Our Rule Breaker Portfolio has purchased three biotech drug makers and one bioinformatics company in the last several years: Amgen (Nasdaq: AMGN), Millennium Pharmaceuticals (Nasdaq: MLNM) (profiled in the latest issue of The Motley Fool Select), Human Genome Sciences (Nasdaq: HGSI) (which we sold and are likely to repurchase), and Celera Genomics (NYSE: CRA).
I've spent many months devouring as much as I can about these fascinating companies, and there's one thing that is inescapable: It's astonishingly, breathtakingly, backbreakingly difficult to discover, develop, and market a drug.
No wonder that most investors concentrate on the big pharmas -- the dozen or so huge, multinational drug makers with years of success under their belts. They have the resources to run huge research and development machines and withstand the inevitable failures of drug candidates. A rule of thumb is that after years of preclinical development, only 10% of the drugs that enter clinical (human) trials will be approved and marketed. Sixty percent of those that make it past Phase 1 and Phase 2 and actually enter Phase 3 human trials will garner FDA approval and enter the market, but not all will be successes. Big pharmas can better run this obstacle course, which is said to require 10-15 years and $500 million for each successful drug, counting the cost of failures.
Survivors
Given those odds, the survival of our two unprofitable drug makers Millennium and HGS is noteworthy. And they are just two of a number of new drug companies that have been born and grown in the last two decades, finding the money to survive for the ten or more years it may take before their first drug hits the market. This is both a financial effort and an immense human effort: a raw, grueling superhuman muscularity that just doesn't show up in a company's SEC Form or 10-K filing. Survivors are battle-scarred and tested.
Gifted writer Barry Werth shows the battle in his 1994 work, The Billion-Dollar Molecule: One Company's Quest for the Perfect Drug. This riveting book draws us into the founding and first five years of Vertex Pharmaceuticals (Nasdaq: VRTX), maker of the HIV antiviral drug Agenerase, marketed by giant GlaxoSmithKline (NYSE: GSK).
Werth makes you feel the energy, exhaustion, and perseverance of the people who made Vertex a reality, and it reads so much like a novel that I finally couldn't put it down until done (and I handed it off to my fellow pharma/biotech analyst, Zeke Ashton, who polished it off in a weekend). No investor should plunk a penny into a drug maker -- from an upstart using new biotechnology to pursue drugs to the dozen or so big pharma household names -- without reading this book. It sobered me up, big time.
The cast
The heroes of the book begin with founder Joshua Boger, who leaves what's certain to be a future at the top of Merck's (NYSE: MRK) drugmaking operations to start a new company from the ground up. Backed by a visionary venture capitalist, he assembles a crew of brilliant colleagues, and they all work like military personnel in conflict: Minimal sleep and round the clock activity, relentless pressure in the face of unknowable results. Just the schedule of trips Boger and managers make to Japan and Europe and back is enough to make me gape with awe. Is there anyone who isn't, like me, useless with jet lag for two days after each ocean-crossing?
The challenge
Then what follows are five years of Vertex struggling to keep the money flowing while they spend heavily on drug discovery and development. The title concerns the race to make a drug based on one molecule -- FK506 -- that was believed at one time to be an improvement on cyclosporine and therefore the answer to organ transplant rejection. Werth's capsule:
"Long before Vertex could design and sell its first drug, it had to design and sell itself. Small companies that are years away from making a profit are called story stocks, on Wall Street because their value is based not on products or sales, but information -- information about, and generally applied by, the company. Usually the term connotes a flagrant volatility: Company A's value soars upon winning FDA approval to test a drug in humans, then plummets as Company B files a patent interference. But there is also an element of illusion and seduction, of hype. Among investors, stories generate heat and, if one is fortunate, lust. Far from incidental, the possibility for such arousal is oxygen to emerging drug companies, because it enables them to raise hundreds of millions of dollars in the face of what appear to be wanton, saving and loan-sized losses. Thus Boger's attention to his slide. They comprised a montage of the story he was scripting for Vertex, a narrative that would have to standup, with or without actual progress in the labs, indefinitely and against other stories that were equally compelling." (pp. 95-96)
Written in 1994 about 1989, this gives investors perspective. The pressures for new biotech drug makers today are the same they've been for years. Change Vertex and Boger to HGS and Haseltine, or Millennium and Levin, or the CEO and any other biotech drug maker, and you have the same story. Money, money, money.
We know today of course that Vertex was able to survive. In recent years it, Millennium, and HGS have all sealed deals and raised hundreds of millions to give them financial bases for surviving until profitability. Isis Pharmaceuticals' (Nasdaq: ISIP) (profiled recently in The Motley Fool Select) pact with Eli Lilly & Co. (NYSE: LLY) is the latest example of a company-making deal for a biotech drug maker.
I wish I'd read this book when I started diving into biotechnology and drug making, but better late than never. With his gripping pocket guide to drugmaking history followed by Vertex's struggle, Werth helps an investor have perspective on investing in drug makers of any stripe, where results are uncertain and success rare. With the day-to-day struggles of key management and researchers, you will never again doubt the importance of their quality.
Yet at the end, without ruining the story for you, I was left feeling that luck and so-so management may get a new drug maker farther than no luck and the best management. And that "farther" still does not guarantee success. Vertex has had both luck and top managers, but its future profitability -- despite a healthy financial situation -- is by no means assured. This risk applies to Millennium and HGS too.
Yup, we own (and with HGS, will likely own again) a number of companies using biotechnology to improve the drugmaking process and/or create drugs. Barry Werth's book is a great resource for an investor to see that their very survival today is astonishing. And for HGS and Millennium, who lack even Vertex's one drug on the market from their own development process (Millennium purchased its newly-marketed CAMPATH), great challenges still remain.
That's Rule Breaker investing: Not boring, to say the least!
Fool on!
Tom Jacobs -- TMF Tom9 when out and about on our discussion boards.
Tom Jacobs (TMF Tom9) hopes that biotechnology will lead to drugs that help him remember where he puts his glasses. At press time, he owned shares in Celera Genomics, Millennium Pharmaceuticals, and Vertex Pharmaceuticals. To see his other stock holdings, view his profile, and check out The Motley Fool's disclosure policy.
