Safe(r) ways to play biotech
I recently highlighted a small biotech firm, ISIS Pharmaceuticals, as a potential “value” growth play. ISIS took a tumble after earnings despite being just a penny off of estimates. Despite slightly lower than expected earnings, the Company showed a strong cash position, moderate cash burn, and a likelihood that it would be able to at least make it through full trials for its most promising drug. I know that for some even this doesn’t count as value. Afterall, the Company is not free cash positive and any value ascribed to the Company is derived from future expectations of its drug pipeline of which there are none currently in distribution.
For those looking for more proven business models but still looking to take advantage of the coming shift towards genetic pharmaceuticals as opposed to small molecule pharmaceuticals, a look at ISIS’s partners may clue you into some interesting finds.
Big Biotech
Though the idea of approaching drug discovery through genetic pathways or possibly even creating genetic therapies seems like science fiction, biotechnology is not all about small, cash flow negative startups hoping to change the world. In fact, the five largest U.S. pure-play biotech firms each had revenues in excess of $2.5 billion in 2008 (one has since been acquired and will be highlighted later in this article). Here are three that could pique your interest.
Amgen (AMGN) – Amgen is the first and largest of the biotech companies in the U.S. The Company came to prominence with the release of its drug Epogen, a synthetic version of the protein Erythropoietin (better known to cycling enthusiasts as EPO). Amgen essentially dominates the market for treating anemia in dialysis patients and has used the proceeds from this blockbuster to turn itself into one of the largest pharmaceutical companies in the industry with nearly $15 billion in revenue last year and more importantly a healthy EBITDA of $6.7 billion (40% margin!). Amgen is slightly different from other biotechs in that its therapies have typically resulted from biotechnological research, but are not necessarily genetic or biological agents themselves. In fact, one of the Company’s drugs, Sensipar, is a standard “small-molecule”.
Gilead Sciences (GILD) – Famous for its anti-viral medication used to treat the flu, Tamiflu, Gilead is the second largest pureplay biotech firm in the U.S. It is a market leader in anti-viral therapeutics that target HIV, influenza, and hepatitis B.
Genzyme (GENZ) – Genzyme is the product partner on ISIS pharmaceutical’s most promising drug – Mipomersen – a cholesterol reducing drug for familial hereditary hypercholersterolemia. Genzyme focuses on developing drugs for rare diseases (those most likely caused by hereditary genetic issues). And, due to the fact that most of its drugs have smaller patient pools, the Company must look outside of its own R&D capacity for growth. Thus, Genzyme has taken the approach of many other large pharmaceuticals in helping to provide financing and late stage support to drugs being developed by smaller, less well-capitalized firms (i.e. ISIS). The Company currently has 20 “named” pharmaceuticals in the market and over 20 more in various stages of development. The Company had revenue of nearly $5 billion and EBITDA of $1.2 billion in over the last year.
Big Pharma
Traditional pharmaceutical developers are fast realizing that the well of historical pharmaceutical research methods is running dry. In 2010, upwards of 15% of patented drug revenue will be put at risk as patents expire and there are few mature drugs in development to replace them. As a result, these companies must begin to look elsewhere and have since made large investments in their own biotech R&D, partnered with up and coming small firms, or outright purchased a big name player in the industry. Big pharma remains flush with cash, something much needed for the drug discovery business, and has the experience necessary to help small companies expedite drug trials. As a result, they’re in prime position to make sure they retain their spot as top dog in the pharma world. To me, the best pharmaceutical businesses are the ones who are already looking ahead rather than trying to find ways to change the chemical configuration to their old drugs and repackage them as new ones (*cough* Nexium *cough*) or inventing medically unexplained phenomena to fix (*cough* Fibromyalgia/Lyrica *cough*).
Abbott Labs (ABT) – Abbot is a large life sciences conglomerate which makes everything from medical devices to lab diagnostics to pharmaceuticals. The Company actually purchased ISIS Pharmaceuticals’ diagnostic equipment business in order to grow into the market for genetic diagnostics. Moreover, the Company has been aggressively investing in its own biotech and genetic therapies capabilities in order to expand its pipeline as it faces patent expirations in the coming few years.
Novartis (NVS) - With annual sales in excess of $40 billion, Novartis’ revenues nearly matches even the largest of the aformentioned biotech firms’ market caps. Novartis has embraced its position as a large scale pharmaceuticals manufacturer and has invested in capabilities to manufacture biopharmaceuticals. Using its balance sheet and worldwide reach, the Company is highly active in finding and partnering with small drug discovery firms and, as a result, boasts one of the industry’s largest drug pipelines.
Roche Pharmaceuticals (RHHBY) – This one actually trades OTC which may make it difficult to get a hold of. Roche is a subsidiary of one of Switzerland’s largest life sciences conglomerates and has made my list in order to provide an example of how big pharma is likely to eventually play a role in biotech investing. Roche purchased Genentech earlier this year for $95/share, a significant premium as the stock traded in the 70s prior to its first bid in July 2008. Roche is now a biotech and traditional pharma powerhouse having purchased Genentech and its blockbuster drug, Avastin. It’s likely that as old-line pharmaceutical companies begin to feel the pinch from expiring patents in the next few years, you will see even more blockbuster deals for established (and unestablished) biotech firms as the old timers try to catch up and shore up their pipelines.
Full Disclosure: Author is long shares of ISIS. No positions in any of the other stocks mentioned.
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