Biotech: the buzz, the business

Do you want to live forever? Or clone your favorite pet? Biotechnology is a laboratory-based world packed full of weird and wonderful possibilities like these. Nexia Biotechnologies, for instance, has produced genetically engineered, cloned goats that make spider silk in their milk. Researchers have also found a way to produce spider silk in potatoes.

As bizarre as this sounds, spider silk is highly respected by materials scientists. Crafted through 400 million years of evolution, it outperforms the best synthetic fibers. Spider silk molecules are designed to be pulled, and silk thread can extend 30-50 percent of its length before breaking. Silk is stronger than
steel, as strong as Kevlar, but lighter. The US military is reportedly interested in its capabilities.

But while the biotech industry conjures up many fantastic notions, it actually produces far fewer products. This creates a minefield for the unwitting investor, attracted by the buzz but ill-informed about the business. However, a little research and a few investment parameters make the biotech industry a fully viable investment target.

That said, investing in biotech is not for the faint-hearted. In the long term, it will be an enormous industry, impacting everything, just like information technology and communications have changed life in the last few decades. As an industry in its infancy, therefore, it is understandably volatile.

In the late 1990s, when the dotcom bubble was building, alongside it was a biotech bubble. Thousands of dotcom firms had sprung up all over the world, mostly in Silicon Valley, California; biotech startups clustered in the same region.
At the time, thousands of individual investors - as well as some major venture capital funds - poured billions of dollars into dotcom and biotech startups, hoping to capitalize on what appeared to be industries with limitless growth potential.

One sector promised to revolutionize the way we communicate and do business; the other promised, in some cases, something approaching the Holy Grail. In both cases, there proved to be a great deal of fine print ignored by investors. Not surprisingly, one bubble burst, quickly followed by the other.

To make matters worse, some of the high-profile players in the biotech sector - such as ImClone - found themselves embroiled in highly embarrassing deals. ImClone CEO Sam Waksal was arrested for insider trading, after selling company stock just before the US Food and Drug Administration (FDA) announced that it would reject approval for a wonder drug in development that had led ImClone's share price to soar to extraordinary levels.

Waksal later pleaded guilty to insider trading, and is currently serving time in US federal prison. He'll likely be joined in the near future by Martha Stewart, the American homemaking billionaire, who was recently convicted of lying to investigators about the timing of the sale of her own ImClone stock.

Meanwhile, ImClone has been through two more CEOs and saw its share price slump to less than $6, about 90 percent off its peak price. However, a few months ago, ImClone had a dramatic turnaround in its fortunes. It finally won approval for its colon cancer drug, Erbitux, which went on sale for $2,500 a dose in February. The approval comes as a major shot in the arm for ImClone, which is recovering some of its lost sheen. Its share price has already climbed back up to $47, nearly the same level as two years ago.

Today, ImClone is not the only player in the biotech sector to have bounced back. The sector is currently witnessing a remarkable rebound, with dozens of companies preparing to raise cash from markets as diverse as the United Kingdom and India. Once again, investors are gearing up for another great leap into the unknown.

But what exactly is biotechnology? One definition is simply "applied biology" - that is, the application of biological knowledge and techniques to develop products. Some people use the term "biotechnology" only to refer to the latest developments in genetic science. In its 2002 Global Biotech Report, professional services firm Ernst & Young defines biotechnology as the use of "gene splicing" and other genetic techniques to fight disease or to manipulate the traits of living organisms.

Biotechnology is already a diverse field, and its scope is likely to continue expanding dramatically. Applications of biotechnology are similarly far-reaching, and suggest solutions to many manmade problems are just around the corner. For instance, scientists are exploring the ability of microbes to break down waste, including radioactive and other highly toxic substances.

Principal applications are in three key areas: agriculture (crop plant production and protection, livestock production and aquaculture), health care (diagnostics, therapeutics, regenerative medicine, vaccines, biotech drugs and genomics), and industry (industrial manufacturing enzymes, nanotech and environmental monitoring).

As the Biotechnology Industry Organization (BIO) points out, we have used the biological processes of microorganisms for 6,000 years to make useful food products, such as bread and cheese, and to preserve dairy products. BIO represents more than 1,000 biotechnology companies, academic institutions, state biotechnology centers and related organizations in the United States and 33 other nations.

Biotechnology in the modern sense is quite new. The first genetically engineered organisms were created in the United States in 1973. Now, biotechnology forms the basis of a multibillion-dollar global industry.

According to BIO, the market capitalization of publicly traded biotech companies was $206 billion as of mid-April 2003. Biotech revenues have more than tripled to almost $30 billion annually in the United States alone.

In the Middle East, a small group of investors and governments has apparently decided that the second coming of biotech is an opportunity not to be missed. In Jordan, for instance, the government is actively encouraging the sector by offering various incentives to startups. Realizing that strong research and development is the key to biotech success, Jordan is also heavily promoting new research in its universities and labs.

In Egypt, the government is looking at biotechnology not just from the medical or pharmaceutical point of view, but also in terms of how biotechnology can help Egyptian cotton or wheat gain market share in new markets around the world.

While some governments in the region may be keen on developing local capabilities in biotechnology, most Middle East investors appear content to benefit from the biotech revolution in a more direct manner - by reaping the rewards of biotech investment elsewhere in the world.
According to bankers in the Middle East, after a sharp fall in 2000-02, last year witnessed a significant increase in Middle East interest in worldwide biotech companies.

Many financial institutions from the region have floated their own dedicated funds that track key biotech stocks, while others have launched venture capital funds that will pick up stakes in some of the smartest biotech firms worldwide.

Not surprisingly, most of the biotech investment from the region is flowing to the United States and Europe - the two hubs of global biotechnology research and development. The total venture capital invested in biotechnology in the last quarter of 2003 stood at over $1.1 billion, while for the entire year the figure was $4.9 billion, or nearly 27 percent of all the venture capital investments made during the period. This represents the highest percentage of venture capital investments in biotechnology for more than a decade, indicating that funds are once again bullish on biotech.

The US biotechnology industry is, by far, the world's largest. Although there are some 1,570 biotech companies in Europe and around 1,270 in the United States, European companies are far smaller. Amgen, one of the biggest biotech companies in the United States, alone is almost the same size as the whole European biotech sector. According to Ernst & Young, the highest concentration of private and public biotech companies in the United States is in New England and the San Francisco Bay Area. Maryland remains the third most-important biotech state, coming behind Massachusetts and California in numbers of companies.

More than 155 biotechnology drugs and vaccines have been approved by the US Food and Drug Administration. There are also more than 370 biotech drug products and vaccines currently in clinical trials, targeting more than 200 diseases, including various cancers, Alzheimer's disease, heart disease, diabetes, multiple sclerosis, AIDS and arthritis.

Biotech companies can be categorized into those that are already raking in profits from products in the marketplace, others that have research pipelines about to feed into the marketplace and still others at an earlier stage of development.

Examples of companies with products already out include Amgen, Biogen, Genentech, Genzyme, Immunex and Biochem Pharma. "Promising" companies include Gilead Sciences, IDEC Pharmaceuticals, Celera Genomics, Millennium Pharmaceuticals, Incyte Pharmaceuticals and Human Genome Sciences. The companies at an earlier stage of development are, of course, a riskier bet.

Given the high technology involved and the newness of the biotechnology industry, investment risk is generally considered to be high. Many biotechnology companies are barely out of startup mode and dependent on investors' capital rather than on having revenue-earning products on the market. As companies release products from their pipelines into the marketplace, assuming powerful sales and marketing capability, investment risk drops. Simultaneously, however, the opportunity for massive gains from investing at an earlier stage of development is lost.

Given dependency on as little as one key product for company success or failure, biotechnology companies are vulnerable to how that product fares. If test results fall below expectations, investment can quickly dry up. There is also a danger of hype associated with the advanced nature of the science involved leading to inflated share prices, and then the inevitable plummet.

At the moment, the Human Genome Project is one of the dominant industry topics. Begun in 1990, the Human Genome Project is an initiative to identify all of the approximately 30,000 genes in human DNA and determine the sequences of the 3 billion chemical base pairs that make up human DNA. The Human Genome Project was completed ahead of schedule in 2003 with the completion of the mapping of the human genetic sequence.

A senior executive of Celera Genomics, commenting on the "hype and frenzy" that has surrounded the human genome, said "there is substance to the genome, but it needs to be mined, molded into knowledge, and from knowledge into drugs."

In 2001, hype had created an investment bubble, with biotechnology companies massively overvalued, in similar fashion to the dotcoms. Early valuations were frequently based on promise rather than product, and the bubble burst. Biotech companies are now leaner and must demonstrate clear routes to the marketplace to survive.

The extraordinary advances in biotech are stirring heated ethics and public health debates. This has further raised industry volatility. Genetically modified (GM) food in particular has been met with a severe consumer backlash in some parts of the world, especially in Europe.

At stake are billions of investment dollars behind the development of products including corn, potatoes and soybeans that are engineered to resist pests or produce higher yields.
Companies such as Monsanto and DuPont have spent millions fighting the "Frankenfood" reaction against biotech, and their respective reputations.

In response DuPont mounted a public relations campaign, releasing a series of television commercials about the future, featuring its "to-do list," which included research to "find food that helps prevent breast cancer."

Investing in biotechnology stocks is suited to the patient investor, seeking above-average capital gains for long-term investing. Biotech investing is challenging because of the market's volatility and the number of unknowns with the advanced sciences involved.

In the pipeline. There are some basic guidelines that can be set for biotech investing. The first one is look at a company's product pipeline. Look for at least two products in trials, so if one happens to fail the company is less likely to go under. Another approach is to look for a company with a specific technology that is necessary for other companies or products to function. But be wary of so-called "platform technologies" that are all promise, no product.

Niche breakthrough technology can also be a strong investment. For example, companies that focus on antiviral drugs for the treatment of HIV are hot prospects.

Alternatively, take the portfolio approach with a top-five selection, or invest in a fund. Consideration of the company's managerial expertise is naturally important. Look for senior management with proven experience of taking similar products to the marketplace. Also, in evaluating a company, take into consideration its intellectual property portfolio, which can be a crucial component of biotech competitive advantage.

Further, look at the company's collaborative spirit - its ability to nurture a strategic network of alliances. This can include ties to the academic community for research, and agreements with well-established companies for research and marketing, especially blue-chip drug manufacturers. These companies are getting in on the biotech act and are investing billions in carefully chosen targets. They will not do so on a whim, providing investors with an indication of a sound investment.

Taking a lesson from Microsoft's enduring success - despite marketplace criticism of inferior software - look for companies with the ability to master the market. Also, given the length of development times for biotech products, particularly passing through the various regulatory screens and clinical trials, a company needs to have the financial backbone to survive until the moneymaking years.

Biotechnology undoubtedly has a bright future. There are a whole range of diseases that need to be conquered. According to the World Health Organization, there are an estimated 10 million new cases of cancer annually. That is a powerful driver of innovation and market demand, which will help power the continued expansion of biotech and, hopefully, improve the quality of life in the process