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Why Big Pharma Needs Biotech

By Rob Fannon, editor Phase 1 Investor
Wednesday, 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




Market Notes
Bayer and Schering Plough lead the Big Pharma rally... both at new 52-week highs.
 
Energy pipelines at new highs: Magellan Midstream, Kinder Morgan, Enterprise Products, and Sunoco Logistics.
 
Foreign blue chips at new highs: Vodafone (U.K.), Companhia Vale do Rio Doce (Brazil), Endesa (Italy), and China Mobile.
 
Earnings today: ConocoPhillips, eBay, McDonald's.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%

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