5
planning.
Can we predict when the biotech
sector should rise? Usually, biotech
stock prices begin to rise by spring
and reach their peak by the end of the
summer. This is attributed to the sea-
sonal cycle of scientific meetings that
usually match the academic calendar.
Typically, the summer months, are a
slow period, as the news flow is kept at
a minimum and then picks up as the fall
season approaches. But because of
the upcoming congressional elections
in November, politicized healthcare
costs and drug-pricing controls can
sometimes put a damper on drug mak-
ers. However, this year could be differ-
ent, as it will be just one year since 9-
11, and the anthrax scares that swept
the nation. Politicians have responded
to the fears of bioterrorism by appro-
priating funds approximately $1.2
billion dollars to address the concerns
over bioterrorism. Funding of this mag-
nitude will surely attract the attention
of mutual fund managers, who will be
contacting companies and combing
documents to identify those biotechs
going after a piece of the pie. However,
for you the individual investor, the
bulk of the funds will go to academic
or research institutions doing basic
research on bioterrorism-related
agents. Therefore, we don't anticipate
significant share price appreciations
for most, if not all biotechs from this
bioterrorism initiative.
Although the biotechnology sec-
tor as a whole did not offer many re-
turns to investors in 2001, there was
clearly renewed interest overall. In
terms of the amounts of publicly raised
capital, 2001 was second only to 2000.
The sector continues to attract even
more institutional investors and is
showing considerable signs of matur-
ing to a level that should allow com-
pany-specific performance to dominate
overall sector performance. Addition-
ally, the sector is beginning to make
valuation adjustments for specific
types of companies that make up the
broader sector. Product-development
companies for example, especially in
clinical development, will likely com-
mand higher premiums than platform
companies only, or companies that
supply services to the biotechnology
and pharmaceutical industries.
For those biotechs that develop
and market novel therapeutic agents,
we expect them to garner higher valua-
tions than "me-too" drugs, especially
when developed in areas of unmet
medical need. We do not expect to see
valuations differ based on drugs being
small-molecule compounds or biol-
ogics, but those companies with
drugs/therapeutics linked to the mo-
lecular basis of a disease are likely to
see greater success in the high attri-
tion game of drug development. Why?
Because drugs/therapeutics that target
the molecular basis of disease, or the
root cause of the disease, have the
potential to alleviate disease for the
long term, whereas drugs that treat the
symptoms cannot. Does this make a
difference? Absolutely. Ask a rheuma-
toid arthritis (RA) patient who was
treated first with methotrexate and later
with Enbrel. Enbrel targets a molecule
that is closely associated with the ba-
sis of the disease, whereas methotrex-
ate just treats the symptoms. Enbrel is
a blockbuster biological, and based
upon what we've all heard about the
Amgen-Immunex deal, Enbrel is and
will be a huge revenue generator.
Tips Sheet
Whether they're companies, tech-
nology, products, or people; they are
never as great and usually not as bad
as described. The biggest mistakes we
have seen that the investors tend to
make come from over-reliance on mar-
ket enthusiasm and expectation, and
ignoring the research, relevance and
rationality of a company. We routinely
see analysts and investors cheer and
jeer companies based on a superficial
"if they can" analysis. The model is
often based on the best-case scenario
of a company with a projected earn-
ings stream and then discounted to a
reasonable current value to determine
a decent entry point or value for the
biotech company. No wonder the bio-
tech sector gets so easily misunder-
stood -- too many Wall Street analysts
wearing lab coats and trying to be sci-
entists in the hopes of understanding
and deciphering biotech applications
to determine viability. What is left for
the investor? It's not easy to separate
the truth from reality, but it can to be
done with a bit of research. Investors
can be naïve or be infatuated when it
comes to the science and technology,
but drug makers can't Fool Mother
Nature or the FDA. For the drug mak-
ers, there really is a simple logic to get-
ting products approved and on the
market: prove it is safe and effective,
and follow the rules. Research and de-
velopment must be done to make the
numbers, and executed by the book to
get a drug approved for the market. So,
investors should be aware that advo-
cacy, lobbying and emotional appeals
may make a lot of noise but they rarely
move the FDA or make a product prof-
itable. The Imclone fiasco, for example,
where you heard that cancer patients
BioTech Stock Report, April 2002
