WASHINGTON, Feb. 20 (UPI) -- Still looking for that technology company with double-digit earnings growth, hot new products, and low excess inventory? Instead of thinking: modems, servers and hard drives, think: stem cells, genomes and auto-immunity.
In other words, think: "biotechnology."
First, let's draw a distinction between what we consider to be the "biotech" firms vs. the pharmaceuticals.
While definitions may vary, pharmaceutical companies are firms which focus primarily on developing, marketing, and producing new drugs for the treatment of disease. Biotechnology firms, on the other hand, lean more toward merging the science of biology with various genetic engineering applications. In addition, their focus is more purely on R&D, rather than on production and marketing.
But there is ultimately a great deal of overlap as the big "pharmas" have invested heavily in many biotechs in the hope of finding cutting-edge drugs, and the biotechs do their research and development with an eye to the bottom line and coming up with viable products (i.e. mostly pharmaceuticals) that stand to make large profits.
By any measure, the biotechnology industry is huge and growing fast: boasting 1,273 companies (300 publicly traded) and a total market capitalization of $353.3 billion -- up a whopping 156 percent in one year. Annual industry revenues are now at $22.3 billion, double what they were in 1993.
Fundamentally the sector remains solid. Currently, 350 drugs are in late-stage development by the biotechs targeting more than 200 diseases. Over $50 billion in investment capital has been funneled into the biotech sector in the last two years alone. And because the biotech sector addresses unmet, significant health-care needs, there will always be a market for its products. This suggests that the sector will remain strongly resistant to economic downturns.
Enter the federal government, which is now friendlier than ever toward the industry as a whole. Recently, the budget of the National Institutes of Health (which is involved in most new drug trials) has been doubled. The Food and Drug Administration has shortened the average review period greatly and has also provided a "fast-track" to ensure blockbuster cures and vaccines receive top priority. The hot topic at the time of our last biotech sector update (Aug. 14) was stem-cell research, i.e., whether it was going to be allowed. Much to the delight of the Biotechnology Industry Organization, President George Bush signed a bill allowing for primary "basis funding." This was a big victory for the industry even though a limit exists on the number of stem cell "lines" that will be made available.
On the legislative side, many analysts expect Congress to grant tax benefits encouraging early stage investments in biotech companies. A possibility also exists of a tax credit for net-operating losses related to biotech research and development. While the battle lines on the new budget are still being drawn, many believe these initiatives will gain momentum later this year.
In our opinion, one of the major catalysts to propel the biotech industry will be the big pharmaceutical companies looking to add new drugs to their shrinking pipelines. Twenty major drugs will be losing their patent protection in the next 3-4 years. Because of the loss in revenue to the big pharmaceuticals from this loss of patents, the companies are desperate to add new drugs and revenues.
This is an opportunity for the biotech companies to negotiate higher royalty payments, as well as an increase in consolidation activity at higher premiums.
No need to worry about funding for the biotechs either. Besides the constant cash injections from the big pharmaceuticals, venture capital money is still flowing strong. In the second quarter of 2001, $600 million of venture capital money was invested in the sector; the same as the previous year. Obviously, with significant reductions in venture capital flowing into the tech sector, the biotechs are taking up the slack.
Technically, it looks like a good time to get selectively involved in the sector. Recent reversals of opinion by the FDA on a few drugs have led the entire industry lower. A recent example of this scenario is Imclone, which has seen recent stock declines of over 70 percent.
Nevertheless, there are opportunities which exist that not only have the ability of producing double-digit earnings growth, but also are likely to withstand a prolonged economic downturn. In this regard, larger biotechs, such as Amgen, may be an excellent choice.
Amgen, the biggest biotechnology company in the world, recently stated in a conference call that they were comfortable with their 2002 earnings estimates and projected 20 percent EPS growth. Amgen's two blockbuster drugs, Neupogen and Epogen, together brought in some $3.5 billion in sales last year. More potential blockbuster drugs are also on the horizon. In April, Amgen will launch Neulasta, its third new drug in six months.
A number of analysts recently raised their earnings estimates because of the early release of Neulasta. The forward earnings consensus for 2002 is $1.41 billion and for 2003 is $1.71 billion.
Much news is expected on the biotech front this week as the Biotechnology Industry Organization (bio.org) is hosting a large conference of biotech investors (institutional) and CEOs in New York City this week (kicking off Wednesday) at the Waldorf-Astoria Hotel, which will feature financial presentations by over 200 small and midsize biotechs in search of investment capital.
(SectorWatch runs monthly, looking at the "state of the sector" for various industries and businesses, including commentary on recent history and potential upcoming action. Mathias and O'Reilly are investment advisers with the firm of Ferris, Baker, Watts Inc. in Washington.)
