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Buying into the biotech boom

There has never been a better time to invest in biotechnology. A number of

factors are working together to promote biotech into a dynamic industry

that joins scientific advancement and profits into a powerful investment

opportunity.

The sector is only about 20 years old. It came into vogue in 1991 as the

promise of biotechnology was revealed to investors. Stock prices surged on

the potential of this relatively new technology. However, subsequent

product failures and poor clinical results quickly sent the industry back

down. Companies were unable to commercialise their scientific achievements.

All that has changed. Sales of biotechnology products were over $20bn in

1999 – 30 per cent higher than the previous year. Currently, over 180

products are in the last stage of clinical development, of which 90 may hit

the market in the next two years. This compares with only about 90 products

that have hit the market in the last 20 years.

This is beginning to have a dramatic effect on the profitability of the

industry. The number of profitable companies is increasing rapidly. In

1998, only 14 biotechnology companies were profitable, yet First Call

estimates more than 40 will be profitable in 2001.

This has gained recognition within the investment community, which

understands that this turn in profitability may ultimately lead to rapid

and sustainable earnings&#39 growth.

Many of the products now in the pipeline have the potential to touch the

lives of people over the next 10 years and beyond. The combination of the

increase in the profitability of the biotechnology industry and the

proliferation of its products through the healthcare system has fuelled a

changein the perception of biotechnology stocks.

Few events demonstrate this more than the initial public offering for

Genentech in the summer of last year. Genentech, whose wide range of

products includes an injection that inhibits the growth of cancerous

tumours, saw its shares nearly double within a month of the issue date.

In fact, many companies within the biotech industry have witnessed strong

stock performance. But while fundamentals remain compelling, the market is

likely to continue its volatility. The investment strategy of the Franklin

biotechnology fund is to invest in companies that have strong fundamentals

and to take advantage of such volatility. We invest in companies that have

products already on the market or are only two to three years away from

commercialisation.

We avoid stocks that are strong on hype but weak on the fundamentals. We

have not invested a significant portion of the fund in genomics stocks as

they are years away from profitability and much of their strategy remains

uncertain.

Cor Therapeutics is one of our top positions and an example of a company

that fits our criteria. After discussions with a number of doctors, we

realised that Cor&#39s lead product, which helps people with heart

complications by helping to prevention of blood clotting, was being

prescribed more frequently to patients. As we felt this was not widely

appreciated by the market, we added to our position in advance of what we

felt would be strong sales. Our investment has paid off as the company is

expected to become profitable much sooner than forecast. We expect strong

revenue growth to continue for at least the next two years.

Inhale Therapeutics, which is developing an inhaled form of insulin, is

another top holding in our fund. With the annual insulin market at over

$3bn in the US alone, we think Inhale has enormous potential. It has

already entered into a co-marketing agreement with Pfizer, one of the

world&#39s biggest pharmaceutical companies, completing an important step

toward commercialisation.

Looking forward, we expect more activity with a number of exciting

products and treatments, further raising the sector&#39s profile. We also

anticipate additional consolidation within the industry both by

pharmaceutical companies and other biotech companies. If history is

anything to go by, volatility will remain an important feature but we will

continue to use this to our advantage and invest in companies with positive

long-term fundamentals.

We expect biotechnology to revolutionise healthcare over the next decade

and beyond, leading to big opportunities for both patients and investors –

and patient investors.

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