Why Big Pharma Needs Biotech
By Rob Fannon, editor, Phase 1 Investor
January 24, 2007
Last week, in DailyWealth, I told readers how four of the five biggest drug companies in the world are about to start throwing wads of money at the biotech sector.
Today, I'll show you why biotech companies are so valuable to Big Pharma... and what assets we need to buy if we're to beat them to the punch with our investments.
Right now, Big Pharma is facing a crisis... The patents that cover the billion-dollar, blockbuster backbone of the drug industry are rapidly expiring. One analyst described the situation in fairly dire terms – Big Pharma is headed "off a cliff" into a "patent black hole." By 2011, the big drug industry will lose nearly 30% of its sales to generic drug competition.
Innovation is a prerequisite for success in the drug industry, and Big Pharma is losing the race. Today, the most innovative drug development takes place in the biotech sector.
The biotech industry pioneered the concept of rational drug design – building drugs based on the how the body works. Makes sense, doesn't it? Well, traditional drug development is trial and error on a grand scale – bombarding the body with a bunch of chemicals to see what happens. Biotech, on the other hand, starts by studying the various biological processes of the body. Drugs are then designed to modify these processes.
A few years ago, for example, scientists found that certain breast cancer tumors displayed abnormal levels of one particular protein, called "HER2." Genentech (DNA), the very first biotech company, designed a new drug, Herceptin, to attack HER2. In 2006, Herceptin sales topped $1.2 billion, gaining coveted "blockbuster" status.
But the biggest innovations in the biotech sector aren't the actual drugs, rather the technologies used to develop these drugs. Since the human genome was fully sequenced in 2000, the biotech industry has introduced several different "platform technologies" that mine this data and can be used in conjunction with traditional techniques to make better drugs.
RNA interference, or "RNAi," is one such technology. RNAi, which works by "silencing" harmful genes, fetched a Nobel Prize for its inventors and caught the eye of nearly every big drug company. Merck (MRK) recently acquired Sirna Therapeutics, one of the leading RNAi companies and a Phase 1 Investor recommendation, for a 100% premium.
Big Pharma is obviously willing to shell out big money for biotech innovation in order to restock its drying pipelines. They're going to be on the prowl for companies with products that are already close to market, so biotech investors should seek buyout candidates with promising, late-stage drugs.
In coming issues of Growth Stock Wire, I'll cover why biotech drugs command premium consumer prices and are virtually immune to generic drug competition. And, of course, how investors can get in ahead of the drug industry.
Good investing,
Rob Fannon
Editor, Phase 1 Investor
