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Biotechnology: To the Brave Go the Rewards

   

Biotechnology has always fascinated us at Max's Investment World. After all, wouldn't be nice if scientists could clone a new leg for Max's missing one? Although such a startling development isn't in the cards any time soon, there are definitely some major breakthroughs taking place in molecular and genetic research.

Chief among them is research by Amgen into the "fat protein." Amgen is working, and apparently is close to being able to clone the fat protein gene. This gene regulates fat storage. In five years, that gene could be used to create products for clinical testing and after that, for consumers. Think of it; the gene could be manipulated to control fat, weight, reduce artery blockages and a whole lot more.

True, such breakthroughs are all too rare. And companies that do come up with discoveries are extremely expensive from a price-to-earnings perspective. But there is no doubt that biotechnology as an industry has matured into one with different segments. At the top of the heap are Amgen, Biogen, Chiron and Genzyme, all large companies that are enjoying rising earnings.

Next come second-tier firms such, as Centocor, Gilead, MedImmune and IDEC. These commpanies have products that will generate profits in the not too distant future. Moreover, they are far cheaper than the first-tier stocks.

Finally, there are the true crap shoots. These are small companies that are only on the beginning of the road to a product and profits. There are more than 100 such companies, including Regeneron and Cygnus.

Bottom line: biotechnology rests on the assumption that some ingenius and entreprenurial scientists will not only discover more compelling cures than the pharmaceutical industry but that they will be accepted in an environment increasingly dictated by managed care and tight health care cost controls. It is probably true that biotech companies are better at channeling creative energy and scientific talent than big drug companies. But it is highly questionable whether they can come up with low-cost drugs that are acceptable to the managed care companies and at the same time, reward shareholders with hefty profits.

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