TCS Daily

Where's The Profit In Biotech Future?

By James K. Glassman - March 26, 2001 12:00 AM

Larry Ellison, founder and chairman of software giant Oracle, says that he'd go into genetic engineering if he were starting out in business today. Silicon Valley venture capitalist John Doerr may have made a fortune investing in computer and Internet companies, but he tells his daughter to study medicine. Michael Milken, perhaps the shrewdest financial mind of our time, says that just as the 20th Century was the century of physics, the 21st will be the century of biology.

Lots of really smart people believe that the most exciting technical advances in coming years will come from biotechnology. The mapping of the human genome has given all of us hope in the fight against deadly diseases, and the commercial possibilities seem almost as intriguing. The problem for investors is figuring out which companies are likely to deliver effective therapies and consistent earnings.

Many biotech companies lose money for years while they attempt to push a candidate drug all the way through the approval process at the Food and Drug Administration. Many never make it, and, in any case, it's extremely difficult to pick the winners in this high-stakes game of hit-or-miss. An alternative strategy is to invest in companies that provide products and services to biotech companies. If you don't want to guess who's going to cure cancer, but you believe that a lot of money will continue to flow into the search, think about investing in the people who outfit the cure-hunters.

It's a tried-and-true strategy of profiting from a gold rush - selling picks and shovels to the miners. As a matter of fact, Levi Strauss got rich selling its blue jeans to 19th Century fortune-seekers in California. More recently, companies like Cisco and Sun Microsystems made fortunes selling tools to people chasing the Internet dream. How do you make money on the Internet? Online merchants and publishers still aren't sure, but they bought a lot of Sun and Cisco gear trying to figure it out. In the last year, of course, these two stocks have been taken out and shot by investors as tech customers cut spending, but long-term holders have been rewarded handsomely.

Investing in suppliers to biotech firms isn't sexy - none of these companies will change the world. But they may be able to ride a wave of spending on medical research. Among the more established firms in this arena are Becton Dickinson (BDX), Beckman Coulter (BEC) and Apogent Technologies (AOT). They make thousands of products used in modern medical research, from robots that automate laboratories to special furnaces to the plastic ware and other equipment used to culture cells, as well as more high-tech products for analyzing human and animal tissue. Applied Biosystems (ABI) is a tracking stock for the part of Applera Corp. that makes gene-sequencing machines. In fact, ABI's machines were used to map the human genome.

All four of the stocks mentioned above trade at reasonable price/earnings ratios but may not have the upside potential of some smaller, younger companies. Still, the large firms represent a solid way to anticipate large spending on medical research. Among the more aggressive investments, Affymetrix (AFFX) and Molecular Devices (MDCC) are focused on more high-tech products to analyze cells.

One company I find particularly intriguing is Albany Molecular Research (AMRI), which provides drug discovery and development services, chemistry research and manufacturing for a growing number of biotech and pharmaceutical companies. This may not sound like the cutting edge of biotechnology, being the contractor for innovative companies, but AMRI's customers obviously place a high value on its services. In calendar year 2000, Albany squeezed $24 million in earnings out of its $67 million in revenues. Those numbers represent a 71 percent increase in earnings and a 200 percent increase in revenues for the year. Little wonder that AMRI ranked No. 2 on Forbes magazine's most recent list of America's 200 best small companies. And it's not hard to believe that the demand for medical research services will continue to grow.

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