Outlook 2008: BioTech Offers Investment Longevity

Editor’s Note: This is the 16th Installment of an Ongoing Series Highlighting the Global Investing Outlook for 2008.
By Jason Simpkins
Associate Editor

In 2007, biotech stocks doubled the return of the Standard & Poor’s 500 Index, storming back from a sub-par 2006. And last year’s industry-wide restructuring – fueled by a slew of mergers and acquisitions – has positioned the biotechnology sector to surge again in 2008.

The industry fundamentals are strong, too, as evidenced by both the frenetic M&A activity and the stock-buyback programs of many key players. Last year’s big spike in deals reminds us that pharmaceutical companies will pay premium prices to acquire potential new products and cutting-edge biotechnologies.

Investors looking into biotech companies are typically looking to turn $10,000 into $1.6 million, like early investors in Amgen Inc. (AMGN) did. But new opportunities within the industry have begun to blossom, fueled by the needs of such newly emergent economies as those in Asia and Latin America.

Indeed, biotech firms with the foresight to focus on emerging-market trends have given themselves big-play potential and are positioning themselves to outperform their rivals, as well as the sector as a whole.

Those who want to profit from this sector should look at companies that are focusing on one of two opportunities that figure to be key in both 2008 and beyond. Among the best profit opportunities will be:

  • Bio-pharmaceutical companies developing products, compounds or therapies aimed at treating major diseases.
  • So-called “life-sciences” firms in the fast-emerging agribusiness sector, which is greatly benefiting from sky-high commodities prices.

Let’s take a look at several investment opportunities in both areas.

Better Living Through Chemistry

When it comes to biopharmaceuticals, one leader investors should study is Genzyme Corp. (GENZ), the third-largest player by market value. The stock is part of the Medical-Biomed/Biotech Group, which consistently ranks in the top 25 of 197 groups tracked by Investors Business Daily. The stock was one of the top performers of 2007, soaring 246%.

Genzyme focuses on rare diseases, a segment prone to less competition and higher margins. Its drugs treat diseases that affect enzymes involved with digestion and cell maintenance. Some of the products even have the ability to treat multiple diseases. For instance, Campath, a drug originally intended to treat cancer, is also used to treat multiple sclerosis.

Genzyme reported a 20% growth in revenue for 2007. And the firm had previously projected a five-year rate of revenue growth [from 2006 to 2011] ranging from 16% to 17%. It expects its earnings – excluding special items – to advance at a compound average of 20% a year during that same period.
At JPMorgan Chase & Co.’s (JPM) 26th Annual Healthcare Conference in San Francisco, Chairman and Chief Executive Officer Henri A. Termeer said Genzyme is well-positioned to deliver on its promises.

“We are on track to deliver 20% earnings growth through 2011, and we feel bullish as we look ahead at the picture that is unfolding for Genzyme,” Termeer said.

Investor and entrepreneur Carl Icahn seems to agree: He recently dropped $94 million on 1.5 million shares of Genzyme, fanning speculation the company was emerging as a takeover candidate. Termeer has publicly denied such rumors.

Even if Genzyme isn’t snapped up, it’s a strong industry player with a substantial upside, industry experts believe. As a larger, established player, it has its own global sales force, and a long-term strategic plan that focuses on deliverable growth.

Last year, Genzyme received the National Medal of Technology, which the U.S. president awards for technological innovation. It has more than 10,000 employees operating in 90 countries around the world.

BioMarin Pharmaceutical Inc. (BMRN) is another leader in the treatment of rare diseases. BioMarin shares are up nearly 40% in the past month, a jump largely attributed to FDA approval of its new drug Kuvan.

Kuvan treats an enzyme disorder known as phenylketonuria, or PKU. Left untreated, this condition can impede brain development, leading to seizures and spiraling levels of mental retardation. In the developed markets of the world, about 50,000 people have the rare condition, and BioMarin estimates Kuvan could be effective in 30% and 50% of them. The price each client will pay for the drug will vary, dependent on the severity of each case, dosing levels, and government reimbursement. 

For those reasons, estimates of just how much money the drug will generate are unclear. BioMarin could charge anywhere between $30,000 and $60,000 per patient, per year. The company’s 2008 sales estimate for the drug was between $35 million and $70 million in the United States. Should the drug gain approval in the European Union (EU) this year, BioMarin will get another revenue boost. Since there is no other existing therapy for the disease, nor is there any known to be in development. BioMarin would control the market.

BioMarin has also restructured a joint venture with Genzyme. The two companies co-produce the drug Aldurazyme, a drug used in the treatment of mucopolysaccharidosis (MPSI). BioMarin manufactures the drug, and Gemzyme globally markets and sells it globally. 

As of Jan. 1, instead of sharing all costs and profits equally, Genzyme will record sales of Aldurazyme, and pay BioMarin between 40% and 50% of the proceeds, based on total sales.

“This structure will also reduce management time and provide stronger incentives for each company to maximize the efficiency of its own operations related to Aldurazyme,” BioMarin CEO Jean-Jacques Bienaime said in a statement.

Aldurazyme costs more than $100,000 a year in some places, and generated sales of $96 million last year.

BioMarin has both a strong product lineup and a strong market base.

“I like the BioMarin right here. That's been my biotech stock, and I am not backing away,” Jim Cramer, the former hedge-fund manager and current TV personality, said on the Jan. 14 broadcast of his investing show, Mad Money.

Growing Profits Where None Existed

While this year’s outlook or biotechnology firms looks solid, the U.S. Food and Drug Administration will remain conservative in its approach to approving new drugs – chiefly because of the continued concerns about the 2004 Vioxx scandal. As a result, it’s best to diversify: Invest in several firms and spread your biotech investments across several sections of the industry.

One essential sub-sector of the biotech set is the agri-biotech market, where companies seek to profit from the use of biotechnology to solve farming problems.

One white-hot player in this fast-growing niche is Monsanto Company (MON), the world’s largest seed company. Its fiscal first-quarter earnings nearly tripled because of surprisingly strong pesticide and seed sales in both the United States and Latin America.  Sales for the period rose 36% to $2.1 billion, while earnings rose from $90 million in 2006 to $256 million. The earnings report capped off a stellar year for the company, as Monsanto was one of the best-performing stocks for 2007 with its shares soaring more than 120%.

Monsanto’s results were fueled largely by sales of its herbicide, and its genetically modified seeds. The seeds – which are virtually immune to herbicides and repel bugs – have been in high demand during the global commodity boom that has exploded over the past year.

Sales for Monsanto's Seeds and Genomics segment were $742 million for the fourth quarter of fiscal year 2007, 40% higher than during the same period the year before.

Once highly controversial, Monsanto’s genetically engineered products have established a definite foothold in agricultural markets throughout the world. Farmers in China and India planted more than 17 million acres of biotech crops last year, according to BusinessWeek. Approximately 7% of the world’s farmland acreage is planted with genetically modified crops. While some pockets of controversy remain – and likely always will – Monsanto’s financial performance is a strong indication that sales of these modified agricultural products are only going to increase in the years to come.

“The need for the big row crops is as great as it’s ever been,” Monsanto CEO Hugh Grant said in a conference call with analysts recently.

Indeed, stockpiles of corn, wheat, and soy are at 30-year lows. And with populations and incomes both soaring in markets abroad, demand is at an all time high – but will continue to climb, nevertheless.

Biofuels are adding to demand while also crimping supplies of such products as corn and sugar – a one-two punch that points to rising prices. Indeed, growing demand and the diversion of corn to ethanol production has hampered supplies, helping prices for this key crop soar 49% in the past five months.

“For sure, what’s gotten the whole [agribusiness] industry raging is corn ethanol,” Charlie Rentschler, an analyst at the securities research firm Wall Street Access, told BusinessWeek. “It’s the match that lit the bonfire.”

While it’s true that most of the corn grown gets processed into animal feed, analysts have noted an uncanny link between oil prices and the value of Monsanto’s shares.

According to BusinessWeek, Monsanto’s price gains have been closely correlated with those of oil. When one rises, the other seems to move in lockstep. Over the past year, Monsanto’s share price was 94% correlated with crude oil prices [with the highest possible correlation being 100%]. By comparison, ExxonMobil Corp. (XOM), which produced about 2.5 billion barrels of oil a day in 2007, registered an 84% price correlation with crude oil movements. Also, Monsanto’s stock is only 17% correlated with the price of corn.

Many analysts consider this a statistical fluke, but it’s still a strange, if not suspect, coincidence. With oil having officially breached the $100 a barrel mark, biofuels derived from corn ethanol will certainly be receiving more attention.

Another one-time chemical company that has seen its share price skyrocket because of the global commodities boom is E.I. du Pont de Nemours & Company (DD), known to most people as DuPont.

DuPont recently announced that it expects full-year earnings for 2007 to be at the high end of its previously forecast range of $3.15 to $3.20 per share. The conglomerate also revised its guidance for 2008 earnings upward, to $3.35 to $3.55 per share.

“We expect that continued growth worldwide from our Agriculture & Nutrition business segment and growth from all of our segments in emerging markets will more than compensate for a slower U.S. economy,” Charles O. Holliday Jr., DuPont’s chairman and CEO, said in a statement.

Like Monsanto, DuPont’s success reinforces two important trends that Money Morning has previously identified:

  • U.S.-based multinationals with a significant portion of their sales overseas are well positioned to profit despite near-recessionary conditions and a weak dollar at home.
  • Commodities and companies involved in agribusiness [agriculture chemicals, agriculture equipment, agriproduct operations] are a smart play for 2008.

DuPont, a member of the blue-chip Dow Jones Industrial Average, has a presence in more than 70 countries where the firm’s agriculture segment is a strong player. A leading developer of crop-protection chemicals, DuPont has been developing herbicides designed to protect such critical crops as soybeans and wheat. 

DuPont also recently announced that it received registration approval from the U.S. Environmental Protection Agency for Agility SG herbicide, a new product designed to provide wheat growers with “a better tool for broad spectrum weed control.”

If you really want to diversify your portfolio, you might consider Van Eck’s recently launched Market Vectors Agribusiness ETF (MOO).  This fund reflects the infrastructure of the agriculture industry, focusing on chemicals (34%), agri-product operations (33%), equipment (24%), livestock operations (6%), and ethanol/biodiesel (2%).

This article includes research from a report on biotechnology investing that originally appeared in the Oxford Club Communiqué. For a full copy of that report, please click here.

Editor’s Note: Money Morning’s "Outlook 2008" series last covered Asia.  Next up: Sovereign Wealth Funds.

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