Investment Insider

John McCamant on the future of biotech

There's still big money to be made in the biotech sector, which is growing rapidly, this expert says.

Biotechnology has undergone rapid change in the past decade, with more and more companies entering the field with new drugs and cutting-edge therapies. Medical Technology Stock Letter, which has tracked the sector for 21 years, believes biotech presents some of today's best investment opportunities.

The editor of MTSL (www.bioinvest.com ) is John T. McCamant, who joined the publication 14 years ago as associate editor. This followed a stint as an analyst for a hedge fund that focused on the life sciences industry. McCamant—who succeeded his father, Jim, as MTSL's editor—has built an extensive network of contacts within the biotech industry, including physicians, CEOs, scientists, investment bankers, and venture capitalists.

From his office in Berkeley, CA, McCamant spoke recently with Medical Economics Senior Editor Dennis Murray.

How will the biotechnology industry be affected by the events of Sept. 11?

Over the next decade, I don't think any industry has better demographics than biotech. And my opinion didn't change after Sept. 11. The baby boomers may be the most powerful demographic known to mankind. As these folks age, the demand for biotech drugs—whether for chronic illnesses or lifestyle improvements, such as for hypertension or erectile dysfunction—will grow at an unprecedented rate.

Think about this: The total market capitalization of 339 publicly traded biotech companies is now roughly $331 billion. That sounds like a big number, yet it's smaller than the combined market cap of Merck and Pfizer. So there's lots of room for growth.

Do you think the Federal Reserve's rate cuts will help biotech companies?

They probably won't have a direct effect, because biotechs don't take on debt. They do straight public offerings to raise capital. Probably the most important thing about the Fed's cuts is that they have the potential to help the overall investment environment, which in turn would help biotech.

What advantages will biotech enjoy in this decade that perhaps it didn't during the 1990s?

Many biotech companies are flush with cash these days, and either have their first product on the market or are about to introduce one. That wasn't the case 10 years ago, when many biotechs were just starting up. Now at least 20 public biotech companies are profitable, with an estimated 250 to 300 drugs in late-stage clinical trials.

Genomics has gotten a lot of press over the past few years. What's the outlook for investors?

Not good. The sequencing of the human genome was a great scientific event, but it wasn't an event for investors. Yet these genomics companies managed to create a lot of hoopla and raised piles of money on false promises, similar to the way many Internet companies attracted investors.

So there's no potential to make money investing in genomics?

There's the potential to profit, but it's still many years away and will likely involve only those genomics companies that change their business model to become drug developers. Celera Genomics Group, after raising billions of dollars, realized in late 2000 that it needed to do something more than collect data to remain profitable. So now it's into drug development. That's great, but the company doesn't have a long enough track record in this area for us to consider it a good investment. None of the genomics companies does.

Which sort of situation could be the most problematic for biotech?

Traditionally, it has been cash flow, but 2000 was the best financing year ever for biotech companies, with $33 billion raised. I don't believe cash will be a problem, but if it is, the worst-case scenario would be that the larger biotechs—such as Biogen, Chiron, and Genentech—will merge with or acquire smaller ones, reducing the number of opportunities for investors.

What advantages do physicians have in evaluating biotech companies?

The biggest advantage is that physicians will recognize what conditions and systems the products are targeted to, and how they might be an improvement over the therapies currently available.

Do you rely on doctors to help you evaluate companies?

Not so much to evaluate the companies themselves as the companies' products. But, yes, physicians' knowledge is a big help to us. It serves as a nice balance to the slick dog-and-pony shows the companies present.

Describe how you research a stock.

Naturally, we examine the numbers and the company's products. But equally important is management. Over the years, we've heard about a lot of good science, only to see the company founder because it didn't have talented people at the top.

Within a biotech company there are so many key decisions to be made, including how and when to raise money; which clinical indications each product should target; and when to partner or merge with other companies. In many cases, because it takes years to get some of these drugs to market, really good management is more important than really good technology.

Give an example.

Sure. A pharmaceutical firm in Ireland called Elan (ELN) has done more than 20 acquisitions and 60-odd partnerships or joint ventures with biotech companies within the past five years. Management thinks creatively and makes things happen. They've fostered a very dynamic corporate culture that allows them to access various kinds of technology and, where possible, to integrate them.

You've said you look for stocks whose prices have the potential to at least double over the next 18 to 24 months. Name some that fall into that category.

Icos (ICOS) has developed a monster drug for erectile dysfunction, called Cialis, in a partnership with Eli Lilly. It's expected to be more effective than Viagra, with far fewer side effects. Bill Gates owns about 10 percent of the company and is on its board of directors. But the Lilly deal really validated the stock for a lot of investors.

Another stock we're recommending is Cor Therapeutics (CORR). It has an FDA-approved injectable drug called Integrilin, to help prevent heart attack or sudden death in patients who have unstable angina and non-Q-wave myocardial infarction, and for use in patients undergoing balloon angioplasty. The company has a broad portfolio of other cardiac drugs and a good pipeline.

A third favorite is Cell Genesys (CEGE), one of the world's leaders in cancer vaccines, mostly for lung and prostate cancers. These vaccines will allow cancer patients to prime their immune systems to better attack rogue cells. The vaccines have shown good results in Phase II trials, and will be entering Phase III trials soon. The company has good cash flow and a strong management team.

Do you automatically sell a stock that meets your price target?

No. We re-examine the fundamentals and ask ourselves whether the companies are stronger than they were when we purchased them. If they are, they remain in our model portfolios. For instance, we've held ImClone Systems (IMCL), a biopharmaceutical company, since 1996.

Many physicians don't want the hassles of monitoring individual stocks. What about purchasing biotech companies through a mutual fund?

I don't advise it. Doctors are smart enough to be able to combine their own research with what they read in a publication like ours to come up with four or five good biotech stocks. Why should they pay management fees to a mutual fund run by some kid who probably doesn't know half of what they do about medicine?

 

Dennis Murray. Investment Insider: John McCamant on the future of biotech. Medical Economics 2002;1:43.