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Biotechnology Companies:
Science or Fiction?
The biotechnology industry has a futuristic appeal because it is about medicines that "promise miracles" even though there are companies that are without products, revenues, earnings, or scientific legitimacy. Science and technology attracts investors who want to invest in tomorrow. But investors need to be able to distinguish the science from the fiction in order to make good decisions on which companies to invest in. Selecting biotechnology stocks does not follow the conventional methodology that is looking at its PE, EPS, financials, etc. Biotechnology stock picking follow a different set of rules. One consideration of how to pick biotechnology stocks is to concentrate on the company's technology rather than just its products. Why this approach? Let's take a step back and review some of the history of biotechnology.The key difference between a pharmaceutical company and a biotech company is that pharmaceutical companies typically use inorganic chemicals to develop new drug compounds. While biotech companies utilize recombinant DNA technology to produce large quantities of compounds that are nearly identical to naturally occurring substances from the human body as well as organic material from plants and animals, to treat disease. Recombinant DNA technology involves isolating the genetic material encoding a specific protein, amplifying the genetic material, and then transferring it into another cell to produce the protein of interest that possesses therapeutic properties. A drug can be made and massed produced by a company instead of only being found in trace quantities in humans or animals. Besides, pharmaceutical companies are finding out that screening and shifting for novel compounds through the conventional methods is becoming more difficult and expensive.
Most of us, probably remember studying genetics in high school - Mendall and his peas. Genetics has been around a long time and long before the venture capitalists became involved in biotechnology. The increase in biomedical research along with the close ties biotech companies have forged with academic research centers and pharmaceutical companies, should no doubt result in an accumulation of novel compounds that can be evaluated for therapeutic purposes. So, its no wonder that in the 1990s more biotechnology companies emerge. Let's take some examples.
Genentech and Chiron have the reputation for the best science since they frequently publish their findings on their science and technology. Both Genentech and Chiron are well respected and profitable biotech corporations. Then there is Amgen, the bell of all biotechs who made its name by challenging a big pharmaceutical corporation over its anti-anemia drug and won. Amgen does not produce the volume of scientific publications as Genentech and Chiron, but its secrecy has rewarded it with profits because it chose to keep its secrets rather than handing information publicly for its competition to read and improve on. Amgen has business smarts and the philosophy of not showing your hand has rewarded it handsomely.
The biotech business is about knowledge and competition. Who has the best knowledge but also has the ability to use that knowledge to compete effectively and efficiently to gain profits and have the staying power to retain and cultivate more market share.
You don't need to be a rocket scientist to understand the technology, but just a smudge of knowledge to distinguish what is feasible and what isn't in biotechnology.
About the AuthorNadine Wong is the Editor of BioTech Navigator, a monthly newsletter providing analysis, interpretation, news and commentary relating to the biotechnology industry and company developments for biotechnology stock investing. She has an MBA from Simmons College, Boston, MA, and has accumulated many years of financial experience as an analyst from several industries such as the high tech industry, biotech industry and retail.
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