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					The Meytav Newsletter
Issue no. 15 – June 2006
Dear All. "Back to Business!!" We use this cliché often, but it is for real. With all the respect we have for science and research (and we do…) – we need to remember that these companies we work for are meant to create value – for the employees, entrepreneurs, shareholders, Upper Galilee, Israel, the biotech industry – everyone. Creation of value is the ONE common denominator for all the companies within Meytav and the underlying driver for ALL of its activities. The recent flow of Biotech companies to the TASE (Tel Aviv Stock Exchange) – leads us to believe that there is a future for the industry: "The public is buying!!". Well, this risky statement is true for a very limited amount of the time and there is little to count on – the market for this type of shares is very volatile and there will still be many cycles of "Boom" and "Bust" before we can sit back and "enjoy" the stable and steady industry. This was the state of affairs in the US biotech industry in the early 80's – a new industry fighting for investor recognition. Even though many things have changed – this is still not considered main stream – and the investor market needs education. I would like to share with you a piece that was written by a boutique investment bank specializing in biotechnology investments. This is how this bank tries to "EDUCATE" the investors - what is this industry, where is it going, and why should you take your "hard earned dollars" and put them on this very risky enterprise. This is important – since this is how the market looks at biotech – companies need to "fit in" into the acceptable model. Trying to be unique, unlike others and original is great if you are in the fashion business or opening a new restaurant – but trying to educate Wall Street is almost impossible so you need to try and get to where the market expects you to – R&D, Products, Profits and Liquidity – in that order. Here it is – Biotechnology for investors (beginning ones, at least – do not send this to Warren Buffet): What Is Biotechnology? Simply stated, biotechnology is the use of biological processes to create or improve desirable products. Scientific breakthroughs in cellular biology and biochemistry over the past two decades have fueled growth of the biotechnology industry, with particularly impressive outcomes in the human health setting. Manipulation of biology to produce desirable products is not new, however, and can be dated back to 4000 B.C., when the ancient Egyptians produced one of the first biotechnology products: beer.


How Does Biotechnology Differ From Pharma? The biotechnology approach to development of therapeutics for the treatment of human disease differs from the traditional pharmaceutical approach in many ways. Historically, the pharmaceutical industry has been focused on chemical-based drugs, such as aspirin, antihistamines, and oral contraceptives. In many cases these drugs are orally active compounds, have mass-market applications, and are marketed to primary care physicians. To reach the prescribing audiences commercially, and realize the sizable market opportunity for certain of these drugs, the pharmaceutical industry has amassed very large sales-andmarketing organizations, which have proved in many cases to be unsustainable cost structures. Biotechnology companies, by contrast, typically focus on the development of protein-based drugs, which in many cases are designed to be administered by physicians, and are often indicated for use in severe or chronic disease. Sometimes these drugs offer significant improvement over existing therapies, and in many cases may address a completely unmet medical need. These types of drugs become very high-value tools for physicians and are often priced at significant premiums. Given the biotechnology industry’s focus on specialty markets, salesand-marketing infrastructure requirements are low in comparison to pharma. The primary sales call is often delivered to a specialist, such as a hematology oncology physician, rheumatologist, or dermatologist. With this commercial focus, there is need for far fewer sales representatives. Success Stories There are many examples of biotechnology products that have profoundly changed patient management, including Enbrel for rheumatoid arthritis (RA), Epogen in dialysis, and Synagis in the prevention of respiratory syncytial virus (RSV) in premature infants. A more recent example comes from the oncology field, where the availability of new, highly specific biotechnology drugs is providing benefit to patients and creating major change in treatment paradigms. Examples of these drugs include Avastin, Erbitux, Tarceva, Rituxan, and Herceptin, which all have had profound impact on the clinical settings in which they are used. Four Reasons to Invest in Biotechnology Innovation. There are 1,400-plus biotechnology companies in the United States, more than 300 of which are publicly traded. These companies have contributed to a growing sector pipeline now populated by more than 300 drugs in clinical development. Drugs drive value and represent the most important barometer for health in the industry. Moreover, the biotechnology product pipeline will increasingly augment the pharmaceutical industry’s pipeline.


Growth. As mentioned earlier, biotechnology is an industry that can be characterized by a series of records. The noncyclical growth profile of the sector will be increasingly attractive to growth managers seeking late-cycle, economically insensitive growth. Notably, the Biotechnology Industry Organization (BIO) estimates that sales have grown from $9.3 billion in 1995 to $33.3 billion in 2004; Moreover, companies such as Genentech, Gilead, and Amgen have undergone considerable infrastructure and personnel growth over the past several years. According to the BIO, employee growth in the biotechnology industry expanded from 108,000 in 1995 to 198,000 in 2003. Intrasector variety. There is an index that contains 222 therapeutically oriented companies ranging in market capitalization from less than $100 million to $100 billion. Within this collection of companies, there is a broad spectrum of stocks that should appeal to investors with a variety of investing styles. At most points in time, there are opportunities for biotechnology investment in stable growth, growth momentum, value, large-cap, midcap, small-cap, etc. Performance. The biotechnology industry has undergone dramatic growth over the past decade and it generated considerable shareholder value. As the sector has come of age, there is now enough critical mass of market capitalization, earnings-positive companies, and liquidity for growth managers to invest in the sector more prominently than in the past. To that end, the noncyclical nature of the earnings-positive therapeutic biotechnology stocks should be attractive to general growth managers, with Street projections of 21% average growth for the established commercial companies. The Pharma Dillema: To Build or to Buy a Product Pipeline When biotechnology companies are in the developmental stage, cash management is a critical challenge. Historically, there have been two basic options for developmental stage biotechnology companies to access cash: capital markets and through partnerships with large pharmaceutical or more mature biotechnology companies. The biotechnology industry’s lifelong relationship with big pharma is dynamic, complex, and deserves further description. Why young biotechnology companies need the pharmaceutical industry… Young biotechnology companies often depend on the capital, drug development expertise, and commercial organizations of the larger pharmaceutical companies. While there are many different partnership structures that have been established between small biotechnology companies and large pharmaceutical companies, the relationships typically involve the pharmaceutical partner’s paying an upfront option or licensing fee, making milestone payments upon the achievement of certain regulatory or commercial goals, and eventually paying either a profit or royalty from sales of the drug.


As the biotechnology industry has come of age, deal structure has become more favorable for the young biotechnology companies, which might also be a reaction of the strained growth outlooks for many of the larger pharmaceutical companies. When negotiating a partnership with a larger company, having a weak balance sheet can compromise the terms of the agreement for the young company and thus weaken its negotiating posture. Therefore, successful companies are opportunistic fundraisers. Maintaining a healthy balance sheet may also allow young companies the flexibility of operating on the offensive, buying in additional pipeline products technologies, or enabling intellectual property. … and the pharmaceutical industry dependence on the biotechnology industry is increasing. Pharmaceutical industry consolidation has driven the creation of large, diverse marketing and distribution organizations, with less productive research and development. The sheer scale of many companies in the pharmaceutical industry, combined with less productive research and development, as well as other structural and cultural issues, create dynamics that are relevant to the biotechnology industry. The biotechnology pipeline, which described earlier as the most important sector value driver, is becoming more important to the pharmaceutical industry. More directly, the pharmaceutical industry is increasingly dependent on the biotechnology pipeline to meet its growth challenges. The strategic direction of the pharmaceutical industry overlaps more with the biotechnology pipeline than in the past. The pharmaceutical industry’s focus is on mass-marketed products. But, even though the pharmaceutical industry is not abandoning these markets, it is taking a more prominent focus on specialty products. We hope that this has been useful and interesting as well. Looking forward to continuing our work together,

The Meytav Team.


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