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BioTech Stock Report, April 2002
pharmaceuticals and medical device
manufacturers. For Big Pharma to
maintain their double-digit growth and
longevity, they need to develop new
therapeutic agents. That's where bio-
techs play an integral part of Big
Pharma's strategic plan to bring new
therapeutics to market and maintain
growth. For this, it will pay significant
sums to take a piece of the pie. Just
look at Bristol-Myers Squibb, and the
deal it signed with Imclone.
Reading the Signals
Meanwhile, as the biotech sector
comes of age, biotech investment pat-
terns are evolving too. In the eyes of
today's investor, biotech looks quite
different than it did in the past. Most
investors would agree that the biotech
sector is growing tremendously
though increased breadth, depth and
self-sufficiency. Investors track this
growth through a variety of measures,
like the overall dollar value (market
capitalization) of the sector. For exa m-
ple, in 1986, the aggregate market capi-
talization of the biotech sector was a
mere $4 billion, which grew to $45 bil-
lion in 1993-94, and has now reached
over $300 billion! That's a growth of at
least 75-fold in 16 years.
What is contributing to this
trend? Namely, acceptance by health
care providers that biotechnology-
derived products can treat persistent
diseases and improve patients' quality
of life. This is evidenced by the in-
crease in sales. In 2000, sales of bio-
technology-derived products reached
$18.1 billion, and grew to more than
$20 billion in 2001. This positive sales
trend is expected to continue in the
coming years, as more biotechnology-
related products reach the market. In
fact, these new products have closed
the gap with products generated from
Big Pharma. For example, in 1986, only
5 biotech products received FDA ap-
proval, compared with 93 Big Pharma
products a difference of almost 20-
fold. Those annual product-approval
numbers remained about the same for
the next 10 years, until the mid-1990's,
when the number of biotech products
receiving FDA approval started to
climb, while the number of Big Pharma
products remained mostly steady or
declined. The gap narrowed to almost
two-fold in the year 2000, when the
number of biotech products obtaining
FDA approval reached 32, while the
number of Big Pharma products was
only 66. We expect the gap to close
even more in the next few years, as the
biotech sector has over 300 products
in late-stage clinical trials, and many
more are in earlier stages of develop-
ment. This will lead to an increasing
number of drugs that can obtain FDA
approval. Associated with this growth
will come an exp anding list of biotech
companies achieving profitability.
More significantly in investors'
eyes, these developments are making
the biotech sector far less dependent
upon Big Pharma companies than in
the past. Growing independence will
enable biotech firms to capture a much
larger portion of the value that these
companies are creating, not only for
themselves, but for their investors as
well. And, as we all know, more reve-
nues for biotechs translates into in-
creased research and development
(R&D), which means still more prod-
ucts.
The growth in the biotech sector
is occurring while other sectors are
suffering declining earnings. As we
mentioned in our February 2002 issue,
by the year 2003, Big Pharma will aver-
age 4% to 12% growth, down from its
normal growth rate, primarily due to
loss of revenue from drugs coming off
patent. Meanwhile, biotechs are pro-
jected to have a 22% to 30% growth
rate, due to the introduction of 10 to 12
new drugs that will fulfill unmet medi-
cal needs. Based upon these projec-
tions, the biotech sector has substan-
tial growth potential, which should
provide investors the vehicle for bet-
ter-than-average growth. Biotech ap-
pears to be in a secular upturn in earn-
ings that should continue to lift the
entire sector and provide proof of con-
cept.
Several biotech companies that we
follow come to mind. Genzyme
(NASDAQ: GENZ), which is in the
BioPortfolio, has several products on
the market, and a few in their product
pipeline, that have potential. Our atten-
tion is Genzyme's late stage products
for rare diseases that have a defined
genetic basis. Genzyme has three in
late stage: Fabrazyme for Fabry dis-
ease; recombinant human alpha-L-
iduronidase for Mucopolysaccharido-
sis I (MPS I) Disease; and recombinant
human alpha-glucosidase for Pompe
Disease. All three of these diseases are
rare, and the patient population that
the products will be treating is small,
but the products have a high chance
of being effective, as these are meta-
bolic diseases, which have a defined
target. Although these patients cannot
be cured of their disease, effective
therapy is available. Enzyme-
replacement therapy (ERT) is what
they receive, and Genzyme has had
good success with ERT. Cerezyme,
another product that Genzyme markets
