StreetTalk: BioPharm Stocks: What the Pros Look For - The trend in recent years has been to stash money into a bevy of life sciences companies by investing in a biotech or pharmaceutical stock mutual

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StreetTalk: BioPharm Stocks: What the Pros Look For
The trend in recent years has been to stash money into a bevy of life sciences companies by investing in a biotech or pharmaceutical stock mutual fund


BioPharm International
Volume 19, Issue 4

Burrill is on to something. As we head into spring, it's the big companies with the largest market caps that are drawing the most interest from Wall Street types. Genentech's market cap going into 2006 was $97.5 billion. Another biotech giant, Amgen, was at $97.3 billion. Simply defined, market cap is the most commonly used measure of a public company's size on Wall Street. Market capitalization equals the total dollar value of all outstanding shares. It is calculated by multiplying the number of shares times the current market price. Large-cap stocks usually check in between $10 and $200 billion. Anything above $100 million usually catches the big hitter's attention in the financial markets.

That's an interesting point in the biopharm sector. Companies with sizeable market caps indicate to investors that, while not a sure thing, they represent less risk. In other words, large-cap life-sciences firms know how to research, develop, and market drugs and other products.

On Wall Street, the gurus like to say that risk management is all about sleeping. Specifically, how much sleep will you lose with the risk you've accepted with your investment portfolio? In those terms, the biopharm sector is hardly a sleep inducer—it is more likely to make heavy investors toss and turn all night wondering if they did the right thing.

BIG MERGERS CARRY THE LOAD

The good news is that there is a ripple effect from big life sciences companies with good large market capitalization.

Genentech and Amgen, $100 million companies, bring a lot of investors into the biopharm circle. "Because of these two companies' individual success, the industry's market cap hit an all-time high of $487 billion at the end of 2005, surpassing the previous record of $475 billion recorded in the summer of 2000, and up 22 percent for the year, up from the $400 billion mark at the end of 2004," says Burrill.

Another way that Wall Street professionals leverage large life sciences companies—and bring smaller, more growth-opportunity companies into the mix—is through company partnerships. In 2005, biotech partnerships raised $17 billion in new venture capital money, a record for the biotech industry.

"We have witnessed a very clear indication that mergers and acquisitions, along with partnering, have become a more attractive option for biotech companies to help drive their product development programs and ultimately increase shareholder value," explains Burrill.

He cites the recent merger between Amgen and Abgenix as a good example of the profits-through-partnership trend. "The deal saw Amgen pay $2.2 billion to acquire Abgenix and was motivated, in part, by the deal structure Amgen had in place with its partner," he continues. "Following positive phase 3 clinical trials on Abgenix's panitumumab for late-stage colorectal cancer therapies, Amgen's deal called for 50 percent of worldwide profits going to Abgenix once the drug is marketed. Since panitumumab has the potential to capture 50 percent market share, estimated to be over $1 billion, Amgen decided it was better to buy the company."

Mergers are proving to be a great way to attract investors who, as pointed out earlier, may shy away from investing in life sciences firms. Instead of paying royalties to corporate partners, bigger biopharm firms simply buy them instead and keep all the royalty revenues under one roof. That beefs up the bottom line and paints a better picture on traders' spreadsheets. Smaller, up-and-coming biopharm companies offer larger companies fresh research and products that they may not ordinarily have.

Maybe that's why partnering deals rose by 125 percent in the fourth quarter of 2005, compared with the fourth quarter of 2003, and 102 percent compared with the fourth quarter of 2004.

In 2006, partnerships between life-sciences companies are expected to generate $10 billion in new capital (out of $35 billion raised in the biopharm industry overall). Burrill says that $25 billion of that $35 billion will come straight from the pockets of Wall Street investors. Evidently, investors agree with Burrill's premise that biotech stocks will once again outperform the Dow and the NASDAQ indexes.

The view from Wall Street on biopharm stocks isn't as gloomy as it was in early 2005, when biotech executives were talking about "nuclear winter" for life-sciences stocks. But it isn't a bed of roses, either.

Investors are taking a ride with big dogs like Genentech and Amgen, and keeping an arm's length from unproven, if potentially profitable, smaller companies in the biotech and pharmaceutical fields. That's not likely to change anytime soon.

Celebrity author and business/finance commentator for CNN and Fox News, Brian O'Connell has written for The Wall Street Journal and Newsweek, 79 Radcliffe Drive, Doylestown, PA 18901,267.880.3144, fax 267.880.1939,


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