Can Most People Understand Biotech?

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I'm going to go out on a limb here and suggest that despite the immense complexity of biotechnology, the average person can understand it to some extent. Basically, a biotech business is a bit like anywhere else that involves a company taking an untested path. Which is pretty much the case with any company that isn't well established like Coca-Cola, where the formula is super-proven and any new products often involve small changes (think Cherry Coke, which I adored before I gave up carbonation). While that's a very stable way to operate, it lacks the superior growth potential and chance to make a huge change in the world that biotech companies tend to have. So I'm going to point out a few potential indicators that I think can tell you if a biotech company has the right stuff.

A Wide Base of Operations

Amgen (NASDAQ: AMGN) is a huge company, employing 17,000 people. While I don't know if a biotech company can be considered too big to fail, I know that being the largest employer in Thousand Oaks, California probably gives Amgen some reasonable perks from a property tax standpoint. But I do like how Amgen produces Epoetin alfa (sold under the trade names Procrit and Epogen), which causes patients' bodies to increase red blood cell counts. As one of the more expensive medications that Medicare will pay for, Procrit on its own produces a reasonably solid base of income for Amgen. I also like the work Amgen has done with the autoimmune drug Etanercept (sold as Enbrel), which has a lot of potential for treating a lot of problems because of its anti-inflammatory nature. Since inflammation is a major cause of complications in any kind of illness, controlling this response could work wonders in treatment fields as diverse as cancer and heart disease.

Having a large stable of pharmaceutical offerings gives Amgen both a lot of flexibility in the development of new drugs and a powerful economic moat while the patents are in force. The downsides, of course, are that older drugs can be copied and released in generic form, and that every drug has side effects. But I see Amgen combating these threats effectively.

A Continuity Plan

PDL BioPharma (NASDAQ: PDLI) is a company that's got some good things going for it. It's trading for a 5.66 earnings multiple, carries a 55.7% profit margin, and pays a lovely dividend of 7.9%. However, it's facing an economic crisis because most of its core products will lose their patent protection in 2014. The process of getting a new drug approved and onto the market is a long and difficult one, and the company may actually end up folding by 2016 if it doesn't get new products on the launch pad and through the FDA's approval process ASAP. Three years may not be long enough to get a great product to market, but you could've easily said the same thing about Apple once upon a time.

A Solid Niche

Questcor Pharmaceuticals (NASDAQ: QCOR) is a good example of a focused company. Biotech or otherwise, focusing on a specific niche of filling a need is a great way to make a profit, and this company's 33% profit margins are no joke. I like Questcor's H.P Acthar gel, but I really like the systematic way in which Questcor handles the process of getting it into patient hands and ensuring its revenue stream through the Acthar Support & Access Program (also known as A.S.A.P.). While I'm not loving how Aetna is only reimbursing for Acthar to treat infantile spasms instead of the more profitable and equally useful multiple sclerosis, there are a couple of caveats to this:

1. Aetna isn't everything. Thus far, other insurers haven't completely cut off the MS use of Acthar, and they might never do so.

2. Insurance companies can reverse their decisions, and sometimes it's merely a matter of demonstrating more evidence. If Questcor goes on the offensive, it may be able to convince Aetna to change its mind.

3. With the right marketing, the use of Acthar for infantile spasms alone could still be a solid revenue generator. See my above suggestion as far as developing other successful medications before Acthar becomes a commodity so that Questcor doesn't become a one-horse company, though.

The Different Levels of Understanding

While the chemical reasons for a drug's operation may escape many people's grasp, business is business regardless of what the company actually does. If a company can build a strong consumer base, keep up a solid continuity plan, and thoroughly entrench itself in a profitable niche, it can be successful just about anywhere.

pongun has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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