Asiaweek.com | Riding the Next Dotcom?

NOVEMBER 3, 2000 VOL. 26 NO. 43 | SEARCH ASIAWEEK

Lucas Oleniuk for Asiaweek.
Fegelman (left) and Kolbert are betting on U.S. biotechnology stocks.

Riding the Next Dotcom?
Biotech is hot — and it has real products

So you're still mourning the demise of the dotcoms? Other investors have moved on. "Biotech is where it's at," proclaims Jason Kolbert, vice president of the U.S. equity research division of stockbrokerage Salomon Smith Barney in New York. He has created a portfolio of 21 health-care stocks that Peter Fegelman, head of derivatives at sister company SSB Citi Asset Management, will use to buy options for the newly launched CitiGarant Health Sciences Fund. The biotech sectorwas the dotcom of 1992, soaring to dizzy heights before imploding under the weight of unfulfilled expectations. Kolbert tells Asiaweek's Cesar Bacani why he believes the incipient boom may be more sustainable this time around.

Why the new interest in biotechnology?
The [stock] performance of the U.S. biotechnology industry has absolutely blown away every other sector of health care. The institutional investment community is beginning to focus on the large capitalized biotech companies as a substitute for the U.S. pharmaceutical sector, which faces patent-expiration risk and cheaper imports. People are asking, "What industry is going to have high growth rates and high margins but does not face these risks?"

A lot of investors lost money in the failed biotech boom of 1992.
If I were to ask you at that time to name three billion-dollar biotech drugs, you probably could not have. Today, biotechnology is a reality with billion-dollar blockbusters [developed through genetic engineering] like Avonex, which treats multiple sclerosis, Herceptin for metastatic breast cancer and Respirgam for severe respiratory infections. Essentially this is a price-insensitive industry. You don't have the option of saying, "I'll live without it." Institutional investors are saying, "This is an American industry, there is not a shred of cheaper imports, these drugs are so new that there is virtually no patent-expiration risk."

So which biotech companies do you like?
There are four such U.S. companies in the portfolio. There is Amgen, which is coming out with three new products. Idech Pharmaceutical — it has an excellent new therapy for non-Hodgkin's disease lymphoma. Medimune is an interesting company which has developed an antibody for severe respiratory infection associated with prematurely born babies. Genentech, one of the largest capitalized leaders in biotechnology, is working on a whole new product portfolio associated with cancer. These are not genomics companies [involved in mapping the human gene], although they are investors in genomics like many traditional pharmaceutical companies like Takeda and Yamanouchi in Japan [which are included in the portfolio].

Aren't these companies expensive?
Valuations on an absolute price over earnings —p/e — basis are extremely high. But Amgen's profits are growing at 25% [a year], Genentech at 35%, Medimune at 50%, Idech at 50%. If you divide, let's say, a p/e of 60 or 70 by a 50% growth rate you get a PEG ratio — that's p/e divided by growth rate — of between 1 and 2. That looks very reasonable [for long-term investors, since the stock price today will be considered very cheap next year if earnings actually soar as forecast].

This sounds like the kind of math we were hearing during the dotcom frenzy.
A dotcom has a p/s ratio — price-to-story. It has no earnings. These biotech companies are real companies with earnings. What's the right p/e ratio for a high technology company like Cisco, which trades at around 100 times next year's earnings? It has [an average historical] annual growth rate of 20%, so the p/e over growth rate ratio is around 5. I'd argue that in many biotechnology companies, you have better relative value than that.

Isn't Amgen having legal problems?
We believe that Judge William Young in Boston is about to rule in a matter of days or maybe weeks that [U.S. competitor] Transkaryotic is infringing on Amgen's patents. In the very unlikely event that Amgen loses, it would be very devastating to the company. There will be no impact on Amgen's operations and virtually none on the fundamental earnings picture. However, investor psychology not only in Amgen but in biotechnology in general will be shattered.

You are not too keen on companies working on gene sequencing?
The genomics industry essentially has no proven track record of management, no proven track record of commercializing technology. We think investing directly in genomics is like investing directly in biotech in the early 1990s.

As knowledge about human genomics is freely made available, will competitors from India, Japan and other countries challenge U.S. players?
The next wave of genomics is understanding what a given DNA sequence means. That science is called proteomics. We think that it will be a U.S.-driven industry because it represents the true marriage of not only science and chemistry, but of computerization and computer technology. We think there are many companies principally in the U.S. that will be unraveling the proteomics mystery. It's going to be years and years before start-up operations outside the U.S. offer a viable threat. And we are probably at least five, maybe 10 years away from seeing viable products created as a result of some of the genomics discoveries that are occurring today.

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