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Investing in the biosciences gold rush
May 2004

Imagine investing in IBM back in the 1940s, or Microsoft in the late 1980s. This is the stuff that every investor dreams of. It’s also the most difficult of dreams to realize. The risks are high, the crash-and-burn rate enormous, and the woods thicker with pretenders than contenders. Yet, for all that, the revolution now underway in biosciences is going to be even more dramatic, and produce more fortunes than those of the IT revolution to date.

To demonstrate why the biosciences are changing so rapidly, let me describe the advances made by one company in one application area: pharmaceutical research. Research to produce one new drug goes roughly like this:

200,000 compounds are considered 20,000 are tested 2,000 reach late-stage development 200 reach pre-clinical trials 20 reach clinical trials 1 makes it to market

The technology company in question, called Genetics*Squared (a private company in which I hold shares), recently patented a new technique for researching the pharmaceutical and diagnostic product space, which promises to revolutionize the industry. Genetics*Squared is working with several pharmaceutical companies, including one of the top three, and has successfully demonstrated that it can increase the productivity in this drug production process in at least four of the above stages by one or more orders of magnitude per stage. Since an order of magnitude is a factor of 10, this implies they can increase the productivity of screening new drugs and bringing them successfully to market by a cumulative factor of 10,000 times or more, meaning more new drugs, and at substantially lower R&D costs. But their success is just one example of why the rules of the biosciences are changing so rapidly. In particular, the use of computers has dramatically accelerated the rate of change, as it allows research to be done, in many cases, at computer speeds instead of a human speeds.

Broadly speaking, the biosciences field can be divided into four major application areas: health-related; environmental; industrial; and agricultural. All of these will eventually be huge, but the health-related applications are probably the ones that will produce the most immediate returns over the next 5-7 years, so let me focus on them. Within the health related, there are five distinct sectors: pharmaceuticals and biotech companies; imaging technologies; bionics; therapies; and bio/nano-applications. In this short article, I’m going to focus on pharmaceuticals and biotech companies as offering the most immediate potential.

For investors, there are several areas in pharmaceutical research that are likely to be lucrative. First on the list are cancer drugs. Because of the life-threatening nature of the disease, cancer drugs are high-margin products that can reach market with a far lower succeess rate and a much higher level of toxicity than would be tolerated in a lifestyle drug. Then, too, the relative incidence of cancer is rising for two reasons. First, it’s a disease you only get if you live long enough, and as more and more people are living longer, the incidence of cancer is rising. Next, as the number of chemical compounds in our environment continues to mount, we are surrounded by a rising number of pollutants, fertilizers, and pesticides that may trigger cancer in people with genetic predispositions for breast, prostate, colon cancer and so on. Accordingly, prospecting for young companies that are building a pipeline of new cancer drugs is a good bet in this space.

The next hot area to consider is the diseases of aging. As the baby boomers (born 1947 to 1967) age, they fall prey to arthritis, macular degeneration, heart disease, and so on. The boomers are both very self-centered, and willing to spend money on staying alive and feeling young, so companies that can supply this market will do well. The same reasoning applies to companies developing bionic aids for the aged, especially in the areas of sight, hearing, joints, and teeth, which are the areas that older people find most troublesome.

Next on the list of potential pharmaceutical gold fields are the lifestyle drugs. Here the markets are different: people won’t pay as much for Viagra as they will for a drug to stave off cancer, so the retail prices have to be lower. Yet the number of potential users for Viagra is dramatically larger than it is for a given cancer drug, so the potential here is mass market at low prices versus premium prices for niche markets. The hard part, of course, is companies with these drugs. However, it’s not unusual for ‘me too’ drugs to be better than an initial drug, though of course they don’t have the ‘buzz’ of the first drug on the market.

Biotech companies are different from pharmaceutical companies in the manner they develop their drugs. A traditional pharmaceutical company finds a compound in nature, like penicillin, or in folk medicine, such as digitalis, then identifies the active ingredient, purifies it, tests it, then mass produces it. Or, more recently, they design new molecules to fit specific cell receptors identified by their biologists, then purify, screen, test, and produce the ‘best of the breed.’ Biotech companies, on the other hand, develop a molecule of the shape required for a specific disease by creating a genetically tailored yeast, for example, that in turn produces the desired drug. This is how most types of insulin is currently produced, for example. The advantages are that the result is usually more consistent, cheaper, and harder for competitors to produce a generic equivalent once the patent life has worn off, giving biotech firms a lifecycle financial advantage over drugs produced by more traditional pharmaceutical companies.

So there’s gold in them thar pills – but it’s going to take sweat and smarts to separate it from the fool’s gold.

by futurist Richard Worzel

© Copyright, IF Research, May 2004.

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