The biotech analyst's view - Nature Biotechnology

The biotech analyst's view - Nature Biotechnology: "Eric Schmidt
It is startling to think that over the past ten years Amgen's (Thousand Oaks, CA) market value has increased nearly tenfold and Genentech's (S. San Francisco, CA), nearly 20-fold. Today, these firms are significantly larger than the pharma giants Merck (Whitehouse Station, NJ), Eli Lily (Indianapolis, IN), Abbott (Deerfield, IL), Wyeth (Madison, NJ), Bristol Myers (Princeton, NJ) and Schering Plough (Kenilworth, NJ). Few would have predicted that by 2006, biotech drugs would dominate the commercial landscape in important therapeutic areas like cancer, inflammation and HIV. Whereas ten years ago investors questioned whether the biotech industry was even sustainable, today the key question is, Just how much success will biotech enjoy?

In business, success breeds challenges, and the biotech industry's ability to build on its accomplishments over the next ten years is far from assured. As it matures, the industry will have to deal with a host of new issues reserved for larger, more mature and profitable industries. The rules of the game are likely to change for investors, as well, in a number of significant ways.

In the past, investors awarded nearly every profitable biotech company with a premium multiple on earnings. Companies that achieved profitability were in great demand and conventional wisdom was that each deserved to trade at a premium reflective of its superior long-term growth characteristics and renewable pipeline.

Index Stock Imagery/Newscom
In reality, biotech is a loosely defined group of tools, services, specialty pharmaceutical and drug discovery companies with vastly different business models, customer bases and growth potential. Investors will begin to deal with the industry accordingly, in an arguably more rational manner.

Certain business models, such as the in-licensing–based approach that is so popular today, might be associated with lower long-term rewards to investors. In addition, investors have learned that one success in drug development rarely ensures similar success in the future. In many respects, Amgen and Genentech are anomalies. We believe investors will begin to look at earnings and a variety of other financial metrics (cash flow, growth potential, return on invested capital, asset value, R&D investment) when assigning a valuation to an individual 'biotech' company.

This changing mind-set in the analyst community means that biotechs in the future can expect to be judged much more critically than they have been in the past.

The waning mystique of collaborations
One sure way for a smaller biotech company to gain investor attention has been to partner a drug candidate with a larger pharmaceutical or biotech company. Such partnerships were seen as providing validation for the drug candidate's quality, market potential and chances of success.

I believe the days of biotech requiring large-company validation are over. Investors now realize that drug development is a game of chance. Given the harsh reality that 90% of clinical-stage drug candidates ultimately fail to make it to the market (including 90% of those candidates developed by the larger companies themselves), it is silly to suggest that collaborative deals provide much validation.

In most cases, deals appear to be driven as much as anything by the economics of risk and reward. Many large biopharmaceutical companies are happy to make an option payment in the form of an upfront milestone to see how a drug candidate performs in subsequent trials. In the future, investors are likely to reward only companies who choose to out-license their compounds if the economics of a deal are attractive.

Intellectual property
Historically, it was a safe assumption that any biotech product was covered by solid intellectual property lasting well into the next decade. Each year, investors have become accustomed to pharmaceutical companies losing billions of dollars of sales to generics whereas biotech drugs have been sheltered from any such risk.

Over the next ten years, several small-molecule drugs marketed by the biotech industry will see their patents expire. In addition, it is highly likely that most major markets will create a route for the approval of follow-on biologics. Although protein-based drugs are unlikely to experience the same dramatic loss in value that savaged the commercial value of small molecules, the markets that innovative biotech products serve will gradually become more competitive.

Whereas biotech products are still likely to hold an advantage over traditional pharmaceuticals, in the future they will be forced to compete against ever-more innovative biotech products and convergent technologies like medical device–drug combinations, in some cases.

Trade sales
During an average year, the biotech industry features between two and four significant (>$500 million) acquisitions of smaller companies by larger ones. The perception has been that the combination of a small biotech company's innovative and emerging products with large company manufacturing and commercial capabilities creates a synergy that can be leveraged by all.

With the growing number of successful smaller companies and the need for larger companies to augment their growth, there is the perception that mergers might become more commonplace. We believe smaller companies with late-stage products will hold more leverage over potential acquirers. As a result, we think larger companies will be required to pay a higher price for such acquisitions.

To us, the innovative step in the biopharmaceutical business is drug discovery and development. Manufacturing, sales and marketing have become commodities that anyone with capital can access. In this environment, large companies can only offer small companies one thing: an attractive acquisition price. With the price to acquire a company likely going up, it will become more difficult for larger companies to rationalize an acquisition based on cost synergies alone as has been done so often in the past. In the future, investors will pay a premium for companies that appear to be capable of growing organically as opposed to through acquisition.

Public offerings
Biotech investors have grown accustomed to initial public offering (IPO) 'windows,' which present themselves every two to three years. There is still a widely held perception that during such windows, the buyers of potential IPOs are quite indiscriminate and will purchase stock at reasonably high prices in almost any biotech company. To the extent that history supports this perception we will not likely see much irrational exuberance over biotech in the next ten years.

Investment banks typically advise private companies to pay close attention to when such IPO windows occur and run their IPO plans accordingly. As the biotech industry matures, the boom-and-bust cycles that the industry was known for in the past appear to be subsiding.

Although all sectors of the stock market experience the ebb and flow of investor interest, US biotech investors are more sophisticated now and judge companies more on individual merit rather than on sector trends. In the future, I believe that private companies will only contemplate an IPO when it is apparent that a company is mature enough to capture and maintain public interest.

Product innovation
Biotech products cost hundreds of millions to develop. Perhaps not surprisingly, they are becoming the most expensive medicines on the market. For much of its history, the biotech industry has successfully argued that biotech companies deserve a good return on this investment so that they can continue to reinvest in innovative new medicines that fetch a premium retail price. Likewise, legislators, patient groups and payors have generally rewarded biotech companies with carte blanche when it comes to reimbursement and pricing.

The industry has grown to the point where its products have become a significant burden on the healthcare system. In the future, it appears that products will require some form of cost-benefit justification. Only truly innovative products will avoid pricing pressures. Thus, the industry will need to focus more on innovative products that can recapture their investment. Investor experience with me-too pharmaceutical products highlights the pitfalls of backing such compounds.

Biotech managers are often considered critical to the success of their companies. Many investors believe a good CEO can create significant shareholder value and that particularly capable executives are even able to reverse the prospects of a troubled company. Historically, the biotech industry has considered good CEOs to be in short supply and has handsomely rewarded executives with a successful track record.

Favorable compensation trends for biotech managers have been facilitated by a lack of stock option expensing and trends toward higher executive pay in other industries. In reality, it is very difficult for a biotech CEO to create value. Although the converse is not true (it is easy to destroy shareholder value through fraud, dishonesty or poor business dealings), perhaps the best a CEO can do is to create an environment that fosters success on the part of others.

Biotech is still an R&D-driven enterprise and CEOs rarely determine whether or not a drug candidate succeeds. Those CEOs who are provided with enough successful drug candidates will look like geniuses at business, but might not deserve to be rewarded as such. Investors will likely pay more attention to management compensation in the future.

Biotech's striking success over the past decade has placed the industry on solid footing. Whereas biotech should continue to grow and prosper, matching the success of the past ten years will be a challenge and require successful execution on multiple fronts—and awareness that the financial community will increasingly be judging it with a different measuring stick."


Biotechnology Analyst�: Vault Job Board

Biotechnology Analyst�: Vault Job Board: "Job Description:
A Wall Street Research firm is currently seeking an MD / PhD Biotechnology Analyst. This position requires an extremely motivated person with the ability to quickly/efficiently analyze complex scientific information and incorporate into investment ideas. The position requires travel to conferences and to visit clients. This position is with a rapidly growing Wall Street Firm that specializes in Healthcare Research. The firm and it’s employees are committed to integrity, teamwork, and growth of the company and the development of the staff who help it reach it’s potential.

Job Requirements:
Experience as a Biotechnology Analyst,
MD or PhD Degree preferred.

A Biotech Analyst Who Knows When To Say Sell - Forbes.com

A Biotech Analyst Who Knows When To Say Sell - Forbes.com: "NEW YORK - Brian D. Rye, biotechnology analyst at Raymond James & Associates and a five-star analyst according to San Francisco-based StarMine, rang in the 2002 New Year by telling investors to sell ImClone Systems.

On Dec. 28, 2001, ImClone (nasdaq: IMCL - news - people ) revealed that it had received a letter from the Food and Drug Administration saying that the agency wouldn't even consider ImClone's application for its hyped cancer drug, Erbitux, because the data were not up to FDA standards. ImClone shares, which had previously gone up to $75, dropped 6% that day and 59% in January.

Rye, a certified financial analyst who began covering biotech in 1999 at SunTrust Equitable, didn't believe ImClone's argument that the problem was just a hiccup in the regulatory process. "We downgraded ImClone from a market perform to an outright underperform, which is the equivalent of a sell," he says. At the time, ImClone still sold for $55 a share. Now it trades at $14. Investors who listened to Rye got to keep most of their money.

"When the news came out on ImClone, it cast a shadow on the whole sector," Rye says. Since many biotechnology companies have little in the way of sales or earnings, it is not unreasonable to look at these firms as publicly traded venture capital. In short, it is crucial for investors to have a realistic and honest appraisal of the prospects of a new biotech drug.

Brian D. Rye
At the same time, however, big biotech firms like Amgen (nasdaq: AMGN - news - people ), Genentech (nyse: DNA - news - people ) and Biogen (nasdaq: BGEN - news - people ) continue to show strong fundamentals and sales growth. Genentech's cancer drug, Rituxan, just became a $1-billion-a-year product. "Unfortunately, people don't stop getting cancer in an economic downturn," notes Rye.

That means that there are still good buys for savvy investors. One such company, Rye says, is Ilex Oncology (nasdaq: ILXO - news - people ). The San Antonio, Tex.-based firm's Campath is already approved for leukemia. But the drug is also being tested for non-hodgkins lymphoma and multiple sclerosis--meaning that a significant ramp-up in sales is possible. Since Rye put a strong buy on the stock in Sept. 2002, its share price has increased 230% to $10.47.

Despite its encouraging prospects, Ilex Oncology is not expected to be profitable in 2003. Analysts reporting to Thomson Financial/IBES expect Ilex to lose $1.48 per share in the new year. The best-performing biotech analysts identified by StarMine anticipate a loss of $1.45 per share; this forecast includes Rye's estimate of -$1.38. "

Biotechnology & Pharmaceutical Development Meetings and Conferences Calendar - a Public Service of Cato Research

Biotechnology & Pharmaceutical Development Meetings and Conferences Calendar - a Public Service of Cato Research: "Biotechnology and Pharmaceutical Development Meetings and Seminars Calendar"

List of biotechnology companies - Wikipedia, the free encyclopedia

List of biotechnology companies - Wikipedia, the free encyclopedia: "

Top 100 Biotechnology Companies

The following is a list of the top 100 biotechnology companies ranked by revenue. The first nine companies qualify for the list of the top 50 pharmaceutical companies.


List of biotechnology articles - Wikipedia, the free encyclopedia

List of biotechnology articles - Wikipedia, the free encyclopedia:

Alkermes: Drug delivery firm 'delivers' - BloggingStocks

Alkermes: Drug delivery firm 'delivers' - BloggingStocks: "'Biotechs are the ultimate recession-proof market segment,'"






Law Blog - WSJ.com : There's Nothing Obvious About Patent Law

Law Blog - WSJ.com : There's Nothing Obvious About Patent Law: "The Law Blog has written a bunch of stories on patent law lately, which, frankly, haven’t come easily. Science has never been our thang. We concentrated in History & Literature in college, and the two science requirements we took was a course called Plants (for the final exam we had to list 25 crops) and another called The Atmosphere ( nickname: “The Gut-mosphere”).

The other day we told a colleague that reading a patent law ruling sometimes felt like reading Greek. Thanks to How Appealing, we came across a case this morning that illustrates the sometimes inscrutability of this area of the law. Please read the decision and feel our pain.

The Federal Circuit issued a ruling upholding a decision from the patent office that rejected a patent on the grounds of obviousness. In April, the Supreme Court in KSR made it easier for trial-court judges to call an invention “obvious” and therefore ineligible for a patent, holding that “the combination of familiar elements according to known methods is likely to be obvious when it does no more than yield predictable results.”

The patent at issue in Trans Texas involved a financial-services invention for a system of inflation-adjusted deposit and loan accounts. The court ruled that the invention was really obvious. The PTO Board “did not err in concluding that it would have been obvious to combine the indexed loan accounts disclosed in Mukherjee [an economics study] with the well-known practice of offering loans secured by mortgaged real estate,” said the court. Nor did the Board “err in concluding that it would have been obvious to combine the known inflation-adjusted loan accounts of Mukherjee with the known balloon payments of Weiner.”

Put still another way, an earlier patent, nicknamed “Musamanno” filed in 1983, “demonstrates that it was notoriously well-known to employ data-processors to manage plural accounts,” according to a patent examiner. “And therefore,” wrote the court, “it would have been obvious to a person of ordinary skill in the art to apply Musamanno’s data processor to Mukherjee.” Got that? We thought so.

Law Blog Quote of the Day: With that we’d like to share, thanks to Business Week, a quote from Thomas Jefferson, who clearly laid out the concept of obviousness in patent law. A man “has a right to use his knife to cut his meat, a fork to hold it; may a patentee take from him the right to combine their use on the same subject?”


Law Blog - WSJ.com : A New Sheriff In Town? KSR Shows Its Might in East Texas

Law Blog - WSJ.com : A New Sheriff In Town? KSR Shows Its Might in East Texas: "The Real Law Blog himself, enticingly close to returning from vacation, wrote a story recently about the Supreme Court’s KSR ruling from this term, which dealt with how judges should go about determining whether an idea behind a patent is “obvious.” Some believe the case will give judges more discretion in deeming patents valid or invalid.

We’ve also written about East Texas (here, here and here), specifically the town of Marshall, which, partly because of its reputation as a plaintiff-friendly venue in patent-infringement suits, has boomed in popularity.

So what happens when these two Blog topics collide? That is, how would the judges of East Texas treat the KSR ruling? Earlier this week, we got ever so slight a hint that KSR might change the landscape when Judge Leonard Davis, of Tyler, Texas, cited the decision in ruling for the defendants in a patent infringement suit. Here’s a copy of Judge Davis’s opinion.

The patent at issue involved a business method for financing and repaying credit-card receivables. The patent was invented by Barbara Johnson, who operated a Gymboree franchise and faced difficulty in getting loans based on her credit-card receivables.

In light of KSR, Judge Davis ruled, Johnson’s patent was invalid because it was, well, obvious. Although Johnson “implemented an aggressive marketing and business development program that brought this financing method to widespread use, she did not invent a new business method,” the judge concluded.

“The Eastern District is such a hotbed for patent cases, it is significant that this is how it views KSR,” says Brian Buss, a Vinson & Elkins partner who represented the winning defendants.

“We respectfully disagree with the Court’s findings on [the patent’s] validity,” said AdvanceMe, the named plaintiff. ” We filed a notice of appeal of the court’s decision in that regard.”


Law Blog - WSJ.com : It's Patently Obvious: KSR Is Starting to Have an Effect

Law Blog - WSJ.com : It's Patently Obvious: KSR Is Starting to Have an Effect: "When the Supreme Court handed down its landmark patent ruling KSR three months ago, the Law Blog asked for lawyers’ takes on the case (click here). Most said the decision would make it easier for lower-court judges to call an invention ‘obvious’ and therefore ineligible for a patent.

It looks like they were on to something. Today’s WSJ has a story on the effects that KSR is already starting to have. Last week, a federal judge in San Francisco who previously had allowed a patent-infringement lawsuit to proceed against RealNetworks changed course and granted summary judgment, citing the KSR decision. The case is believed to be the first in which a trial-court judge has reversed his position and dismissed a case outright in the defendant’s favor, citing KSR.

RealNetworks was sued in 2003 by Friskit, a patent-licensing company based in San Francisco, over technology for organizing and playing video and audio files. The judge ruled that Friskit’s patent claims were nothing more than obvious combinations of elements publicly available, including RealNetworks’ own Internet products. Judge William Schwarzer concluded that “the idea of integrating these different components was not novel.”

“The Supreme Court has made it clear what it thinks,” the judge said at a hearing in the case. “Patents are being issued on obvious inventions, and it tightened the reins.” A lawyer for Friskit says the company is reviewing its options for appeal and was confident it could prevail.

Representing RealNetworks is Charles Verhoeven at Quinn Emanuel and Dave Stewart at Howrey (a former in-house lawyer at Real). Representing Friskit is William Robinson at Foley & Lardner and Scott Kaliko at Kaliko & Yeager. Click here for the judge’s ruling in Friskit v. RealNetworks, and here for a copy of the transcript of a court hearing on the issue.


4 Biotech Bets Under $10

4 Biotech Bets Under $10: "

4 Biotech Bets Under $10

By Brian Lawler August 31, 2007

5 Recommendations

Development stage drugmakers are among the most exciting stocks to follow. Yes, they could flame out in clinical testing -- but the blockbusters can deliver incredible returns.

With that as preamble, here are four biopharmas trying to get their first compounds onto the market. They're all worth a place on your watch list.

1. Pharmacopeia (Nasdaq: PCOP)
Like Array BioPharma (Nasdaq: ARRY) (a stock I profiled a few weeks back), Pharmacopeia boasts a large drug pipeline and some well-known big pharma partners. It currently has five compounds in clinical stage development -- with another four in the preclinical stage -- targeting a broad rage of ailments.

Its lead unpartnered drug candidate is in phase 1 testing as a treatment for hypertension. It is an antagonist to both angiotensin and endothelin receptors. The FDA has already approved several compounds blocking either the angiotensin or the endothelin receptor, so both of these targets have been validated in the past.

Pharmacopeia has only one product in phase 2 testing, a drug for chronic obstructive pulmonary disease that is being tested by partner Schering-Plough (NYSE: SGP), so it still has a long way to go until any of its pipeline drugs reach the market.

With multiple big pharma partners like GlaxoSmithKline (NYSE: GSK), Wyeth, and the aforementioned Schering-Plough validating at least the work of its preclinical drug discovery platform, its worth putting this highly speculative drug developer on your watch list.

2. Pain Therapeutics (Nasdaq: PTIE)
I've mentioned Pain Therapeutics in the past when I called it the one development stage drugmaker to buy. Since then shares have been up 13% as the announcement of pivotal trial results for its lead drug, Remoxy, approach.

In the fourth quarter, Pain and partner King Pharmaceuticals plan to release data from the second phase 3 study of Remoxy, their abuse-resistant version of the powerful painkiller oxycodone, which will determine whether the companies have an approvable compound on their hands.

Pain and King plan on going through the relatively easier 505(b)2 pathway for approval of Remoxy rather than the New Drug Application process. There could be hiccups with the drug in the regulatory process if any competitors claim patent infringement, since the 505(b)2 process is similar to the generic drug approval process.

Trading at an enterprise value a tad above $200 million, investors should expect a wild ride in shares of Pain Therapeutics over the next couple of months as all these events unfold.

3. Pharmasset (Nasdaq: VRUS)
One of the hotter areas of drug development right now is in treating hepatitis C. There are relatively few treatment options available in this multibillion-dollar indication, and the two standards of care from Roche and Schering-Plough have been on the market since 2002 and 2001, respectively.

Pharmasset has one of the earlier stage hep C compounds in development, with its polymerase inhibitor dubbed R7128, which is in phase 1 testing. Partnering with Roche should speed up development though, and the recent crashing of ViroPharma's and Idenix Pharmaceuticals' inhibitors removes some competition.

The first results of a phase 1 study testing R7128's safety and pharmacokinetic efficacy are expected in the second week of September, so investors won't have to wait long to get an initial glimpse at whether the drug holds promise or is emitting smoke.

4. SGX Pharmaceuticals (Nasdaq: SGXP)
Even on this list of risky development stage drugmakers, SGX deserves to be labeled as extra speculative, with a market capitalization of below $100 million, $28 million in cash and investments at the end of June, and no compounds in clinical stage testing.

Despite these drawbacks, SGX warrants a mention as it plans to begin phase 1 testing on an unpartnered cancer compound, SGX523, whose target could draw lots of big pharma attention over the coming months.

SGX's drug candidate in question inhibits a pathway that is crucial for the growth of multiple solid tumors. No such inhibitors are currently on the market; SGX's so-called MET inhibitor is expected to start phase 1 testing in the first quarter of next year.

Just last week, shares of Exelixis jumped after it announced that partner GlaxoSmithKline wanted to speed up a review of the development of its MET inhibitor. With Exelixis and GSK working to validate the MET target, other oncology-focused pharmas such as AstraZeneca or Genentech will likely be looking to find other MET inhibitors to put into their pipeline, either via partnership or acquisition.

As long as SGX's MET inhibitor fares positively in phase 1 testing, shares could easily double or triple as its valuation gets more in line with other development stage pharmas with a novel cancer compound. With no data on its compounds to date though, SGX could just as easily fall back into obscurity if Exelixis or other pharmas, like ArQule (Nasdaq: ARQL), working on similar drugs fail to produce robust data on their compounds. Any bet on SGX is really a bet on the success of other MET inhibiting compounds at this point.

Foolish bottom line
Even by biotech standards, the above four drugmakers are speculative investments. Nonetheless, they all possess interesting pipelines that investors should follow because of their potential.

Exelixis is an active pick of our market-beating Rule Breakers newsletter. You can check out all our recommendations as well as get access to our message boards and exclusive content with a 30-day free trial.

Fool contributor Brian Lawler owns shares of Pain Therapeutics, but no other company mentioned in this article. GlaxoSmithKline is an active Income Investor pick. The Fool has a pain-free disclosure policy.


Start Making $67,000 Today

Start Making $67,000 Today: "

Start Making $67,000 Today

By Charly Travers May 17, 2007

671 Recommendations

Only invest in biotech stocks.

Sound crazy? Maybe, but that's what I do. I am not fazed by their high-risk or jaw-dropping volatility. That's because when biotech winners hit, they hit big. Simply put: A basket of carefully selected biotech stocks will trounce the market over the long haul.

The ultimate growth industry
Health care is a sector with a massive demographic tailwind as baby boomers age and spending on drugs and medical devices skyrockets.

Then we have many major advances coming from small-cap biotechs. Due to their small size, a single drug can drive tremendous increases in a company's value. The lengthy and expensive clinical trials required to attain FDA approval serves as a steep barrier to entry, allowing companies that cross this milestone to maintain fat profit margins for many years.

These factors combine to give us an opportunity where explosive returns are to be found.

Growth investors can't afford to ignore biotech
Consider that the top-performing biotechs over the past five years have an average return of 571%. A $10,000 investment in this basket would be worth $67,100 today:


Return, May 2002 to May 2007

Immucor (Nasdaq: BLUD)


Celgene (Nasdaq: CELG)


MGI Pharma


Meridian Bioscience


United Therapeutics (Nasdaq: UTHR)


Amylin Pharmaceuticals (Nasdaq: AMLN)


Sepracor (Nasdaq: SEPR)


Ventana Medical Systems (Nasdaq: VMSI)


Dendreon (Nasdaq: DNDN)




Average Return


Source: Capital IQ, a division of Standard and Poor's.

Looking at past performance alone does nothing to help us make money now. We need to understand exactly what was creating these monstrous gains if we hope to replicate that performance over the next five years.

To help address that issue, I looked to see if there was a defining characteristic driving the performance of these small-cap biotech companies.

That defining characterisitc
As it turns out, one factor is pervasive in this group: explosive revenue growth due to new product launches. As a group, these companies have a compound annual revenue growth rate of 36.6% over the past five years. This is what happens when a small biotech with no marketed products hits it big with its first drug launch.

Consider Amylin Pharmaceuticals: In 2002, the company had a measly $13 million in revenues. That all changed with the approvals of the company's first-in-class diabetes drugs Symlin and Byetta in 2005. These drugs propelled the company's top line over the $500 million mark in 2006. The company's stock is also up from $9.60 in May 2002 to more than $40 today.

We see a similar pattern at United Therapeutics. This biotech had just $30 million in revenue in 2002, nearly all of which came after the FDA approved its pulmonary arterial hypertension drug Remodulin in May of that year. Since Remodulin's approval, the company has done a great job in delivering top-line growth. Long-term shareholders have been richly rewarded with a stock price that has jumped from $12 to $60.

The Foolish bottom line
The returns above show that, as investors, we want to be there before drug approvals happen if we want to lock in the big gains. This means that we need to find high-quality drugs early in clinical development before their potential is fully recognized by the rest of the market.

As a biotech analyst on the Motley Fool Rule Breakers team, I focus on finding small-cap biotech companies on the verge of releasing new products. More important, I want to find them before anyone else does. If you'd like to take a look at the biotech companies I'm recommending today, click here to join Rule Breakers free for 30 days.

Rule Breakers biotech analyst Charly Travers really does only own shares of biotech companies -- though he doesn't have a position in any company mentioned here. The Motley Fool has a disclosure policy.



Behind The Scenes Of Your Mortgage

Behind The Scenes Of Your Mortgage: "A mortgage can be seen as a stream of future cash flows. These cash flows are bought, sold, stripped, tranched and securitized in the secondary mortgage market. The secondary mortgage market is extremely large and very liquid.

From the point of origination to the point at which a borrower's monthly payment ends up with an investor as part of an mortgage-backed security (MBS), asset-backed security (ABS), collateralized mortgage obligation (CMO) or collateralized debt obligation (CDO) payment, there are several different institutions that all carve out some percentage of the initial fees and/or monthly cash flows.

Most mortgages are sold into the secondary mortgage market. In this article, we'll show you how the secondary mortgage market works and introduce you to its major participants.

Secondary Mortgage Market Participants
There are four main participants in this market: the mortgage originator, the aggregator, the securities dealer and the investor.

1. The Mortgage Originator
The mortgage originator is the first company involved in the secondary mortgage market. Mortgage originators consist of banks, mortgage bankers and mortgage brokers. One distinction to note is that banks and mortgage bankers use their own funds to close mortgages and mortgage brokers do not. Mortgage brokers act as independent agents for banks or mortgage bankers. While banks use their traditional sources of funding to close loans, mortgage bankers typically use what is known as a warehouse line of credit to fund loans. Most banks, and nearly all mortgage bankers, quickly sell newly originated mortgages into the secondary market.

However, depending on the size and sophistication of the originator, it might aggregate mortgages for a certain period of time before selling the whole package - it might also sell individual loans as they are originated. There is risk involved for an originator when it holds onto a mortgage after an interest rate has been quoted and locked in by a borrower.

If the mortgage is not simultaneously sold into the secondary market at the time the borrower locks the interest rate, interest rates could change, which changes the value of the mortgage in the secondary market and, ultimately, the profit the originator makes on the mortgage. Originators that aggregate mortgages before selling them should hedge their mortgage pipelines against interest rate shifts. There is a special type of transaction called a best efforts trade, designed for the sale of a single mortgage, which eliminates the need for the originator to hedge a mortgage. Smaller originators tend to use best efforts trades. (To learn more, see A Beginner's Guide To Hedging.)

In general, mortgage originators make money through the fees that are charged to originate a mortgage and the difference between the interest rate given to a borrower and the premium a secondary market will pay for that interest rate.

2. The Aggregator
Aggregators are the next company in the line of secondary mortgage market participants. Aggregators are large mortgage originators with ties to Wall Street firms and government-sponsored enterprises (GSEs), like Fannie Mae and Freddie Mac. Aggregators purchase newly originated mortgages from smaller originators, and along with their own originations, form pools of mortgages that they either securitize into private label mortgage-backed securities (by working with Wall Street firms) or form agency MBSs (by working through GSEs). (To learn more about GSEs, see Profit From Mortgage Debt With MBS.)

Similar to originators, aggregators must hedge the mortgages in their pipelines from the time they commit to purchase a mortgage, through the securitization process, and until the MBS is sold to a securities dealer. Hedging a mortgage pipeline is a complex task due to fallout and spread risk. Aggregators make profits by the difference in the price that they pay for mortgages and the price for which they can sell the MBSs backed by those mortgages, contingent upon their hedge effectiveness.

3. Securities Dealers
After an MBS has been formed (and sometimes before it is formed, depending upon the type of the MBS), it is sold to a securities dealer. Most Wall Street brokerage firms have MBS trading desks. Dealers do all kinds of creative things with MBS and mortgage whole loans. The end goal is to sell securities to investors. Dealers frequently use MBSs to structure CMO, ABS and CDO deals. These deals can be structured to have different and somewhat definite prepayment characteristics and enhanced credit ratings compared to the underlying MBS or whole loans. Dealers make a spread in the price at which they buy and sell MBS, and look to make arbitrage profits in the way they structure CMO, ABS and CDO deals.

4. Investors
Investors are the end users of mortgages. Foreign governments, pension funds, insurance companies, banks, GSEs and hedge funds are all big investors in mortgages. MBS, CMOs, ABS and CDOs offer investors a wide range of potential yields based on varying credit quality and interest rate risks.

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Foreign governments, pension funds, insurance companies and banks typically invest in high-credit rated mortgage products. Certain tranches of the various structured mortgage deals are sought after by these investors for their prepayment and interest rate risk profiles. Hedge funds are typically big investors in low-credit rated mortgage products and structured mortgage products that have greater interest rate risk.

Of all the mortgage investors, the GSEs have the largest portfolios. The type of mortgage product they can invest in is largely regulated by the Office of Federal Housing Enterprise Oversight.

In a matter of weeks, maybe a month, from the time a mortgage is originated it can become part of a CMO, ABS or CDO deal. Few borrowers realize the extent to which their mortgage is sliced, diced and traded. The end user of a mortgage might be a hedge fund that makes directional interest rate bets or uses leveraged positions to exploit small relational pricing irregularities, or it might be the central bank of a foreign country that likes the credit rating of an agency MBS. On the other hand, it could be an insurance company based in Brussels, that likes the duration and convexity profile of a certain tranche in an ABS, CMO or CDO deal. The secondary mortgage market is huge, liquid and complex with several institutions that all take a slice of the mortgage pie.

By Barry Nielsen, CFA

G. Barry Nielsen is a homeowner with a large household of six children. Nielsen holds the Chartered Financial Analyst (CFA) designation and has worked for several large mortgage lenders and financial institutions, including Freddie Mac, American General, Washington Mutual and Countrywide Home Loans. Nielsen owns and operates MortgageGraphics, Inc., a web-based software tool designed to help consumers make educated, risk-based mortgage decisions.


HepaLife Technologies: Leadership With Scientific Background Would Help - Seeking Alpha

HepaLife Technologies: Leadership With Scientific Background Would Help - Seeking Alpha: "

HepaLife Technologies (HPLF), which is focused on the identification and development of cell-based technologies and products, demonstrates the endemic weakness of one shareholder—in this case, one with no scientific credentials—substantially influencing virtually all business strategies requisite to shepherding a medical device through the FDA marketing maze.


Call it a best-kept secret - Austin Business Journal:

Call it a best-kept secret - Austin Business Journal:: "

Call it a best-kept secret

UT campus holds the key to growth of Austin's bioscience industry

Austin Business Journal - April 27, 2001

A subtle shift is taking place in the laboratories of Austin and across the country.

For years, innovations and solutions to problems have been based on physics and related sciences. Smaller chips, faster computers, wireless communications. But that's changing. More ideas are springing from biology-based sciences.

Researchers point to areas such as the government spending more on biology-based research than it spends on research founded in physics. New patents based on biology have exceeded those based on physics for several years. Universities are awarding more degrees in the biosciences than in physics-related areas.

Private industry, too, is making a substantial investment in biotechnology, defined as the use of cellular and molecular processes to solve problems or make products. IBM Corp. is sending $100 million into technological support of gene and protein research; Hewlett Packard Co. and Sun Microsystems Inc. have announced biotech investments.

These trends have not gone unnoticed by the powers that be in Austin.

"It's our belief that Austin will be known as a biotech mecca," says John Hoopingarner, vice president of portfolio companies operations at Emergent Technologies Inc. "High tech and biotech prosper and flourish when there is a high degree of brain power, and universities are the first place you look. It's no accident, for example, that Boston is such a mecca for biotech, with MIT and Harvard."

Emergent's business approach -- collaborating with creators and inventors to commercialize early stage technologies -- relies on access to researchers, and the company sees a lot of potential at the University of Texas at Austin. Since commercialization of new technology is often a hurdle for researchers, it seems a perfect match.

Susan Davenport, Greater Austin Chamber of Commerce director of economic development, works on developing the city's biotechnology industry. The chamber recruits existing companies to locate in Austin and encourages startup growth in the area. She considers the university a valuable partner, too.

"UT completes the picture. It is a world class university doing world class research, and much of it lends itself to startup in this area," Davenport says.

Collaboration between the business community and the university is one of Austin's strong points.

"This city has a history of sharing," says David Smith, vice president of Technology Futures Inc., an Austin company providing information, analysis and insights related to technology and market forecasting.

"That is extremely important for something like this to be successful," Smith says.

Austin's original collaborative model was when the city, university and community together drew Microelectronics Computer Corp., known more familiarly as MCC, to Austin. Similar, current efforts include the Austin Software Council and "Biobashes," chamber-sponsored networking events.

What Austin lacks, Smith believes, is a medical school. "Look at the other places in the country where there is a strong concentration of biotech, and there is a strong medical center," he says.

Other enthusiasts aren't bothered by this apparent shortcoming.

"We think there are a lot of good opportunities with UT," Hoopingarner says. "There may be no sign on the Austin campus that says `health sciences center,' but that doesn't mean there's not a lot of potential for a biotech industry to start. There are the pharmacy and biochem departments. A lot of world class scientists at UT are doing things that are complementary to those at UT Galveston or San Antonio, where there are health sciences centers. They just aren't training doctors in Austin."

According to Juan Sanchez, vice president for research at UT Austin, the university works with medical schools. It is involved in a collaborative bioengineering effort with M.D. Anderson in Houston. He also says there is much more to biotechnology than what is done at medical schools.

"There is a big universe out there and it presents many opportunities for an institution like UT without a medical school to contribute," Sanchez says. "Our efforts to grow the biotechnology industry simply need to be more strategic."

"In the past, most biotech grew up around medical institutions," Davenport says, "and the thinking was you'd be at a disadvantage if you didn't have one. We haven't been hurt by that. Other things are very important. You need a huge computer component, for example, which Austin has. When we started, people hadn't thought of Austin as a biotech center, but we've come a long way."

In a paper she prepared on the potential for biotechnology development in Austin, Davenport identified four areas where research at UT shows particular promise: biological devices, nanomaterials, bioinformatics and pharmaceutical research and development.

In addition to top-notch research scientists, the university provides another important resource for a budding biosciences industry -- a supply of educated workers. There are more than 1,000 students pursuing master's degrees in engineering, and more than 700 enrolled at the doctoral level.

The chamber has a biotech group to brainstorm ways to increase the commercialization of biotech research. Another initiative looks for ways to place university researchers in front of venture capitalists and others in the community, to communicate what research is being done and to look at what might be commercially marketable.

Those kinds of efforts are critical, because many a promising technology never makes it from the lab to the market.

"UT has excellent, strong programs in material sciences, chemistry, physics, biochem and engineering mechanics," Smith says. "They are well positioned to be innovative and aggressive. But UT lags behind in its research ownership and transfer policies. Some other universities, like Columbia, encourage innovation and have excellent policies."

If that problem can be adequately addressed, Smith believes Austin has tremendous potential to play a leadership role in the biotech industry.

"The basic assets are here," Sanchez says. "There are some missing ingredients -- a medical center, advanced facilities optimized for biotech research, and some leadership issues -- but those are things that can be worked on."

Sanchez believes the ability to attract talent to Austin, both faculty and students, is one of the university's main contributions.

"Sending students out into the business world when they complete their studies is our most efficient way of technology transfer," he says.

UT will continue to work with those in the community interested in developing biotechnology in central Texas.

"There are many things that need to be done, and that we are doing," Sanchez says. "It is a multi-dimensional problem, but a solvable one."

"I've been so impressed with how they've opened their doors at UT," Davenport says. "I can't speak highly enough of them. The University of Texas will be a focal point for developing the biotech industry in this region."

Melissa Gaskill is an Austin-based free-lance writer.


sphereit:online.wsj.com/article/SB118817303708409352.html - Sphere

sphereit:online.wsj.com/article/SB118817303708409352.html - Sphere: "

836 blog posts found related to Patent System's Revamp Hits Wall - WSJ.com


Patent System's Revamp Hits Wall - WSJ.com

Patent System's Revamp Hits Wall - WSJ.com:
Globalization Fears Stall
Momentum in Congress;
AFL-CIO Sends a Letter
August 27, 2007; Page A3

WASHINGTON -- A bipartisan effort in Congress to overhaul the patent system -- a priority for some of the nation's biggest technology companies -- is hitting resistance because of concerns the U.S. might be exposed to greater foreign competition.

Patent overhaul appeared to be on a fast track earlier this summer. But plans for a quick vote got derailed last month after the AFL-CIO entered the debate, warning that innovation -- and union-backed manufacturing jobs -- might be at risk if the changes were adopted. The union has considerable clout in the Democratic Congress and expressed concerns with provisions that would expose patents to expanded challenges and might limit damages for infringement.

"At a time when the Chinese government is constantly being challenged to live up to its intellectual-property obligations, we do not want to take actions that may weaken ours," the AFL-CIO's legislative director, William Samuel, said in the pointed missive that was circulated on Capitol Hill.

Attorney David Feigenbaum suggests Web sites for getting a better understanding of the patent-law reform debate and other intellectual property topics.

The sweeping patent initiative -- backed by a business coalition dominated by technology companies such as Cisco Systems Inc. and Microsoft Corp. -- would indeed shift the balance of power of the U.S. patent system. It would make it a bit harder for holders to protect patents. Advocates of the legislation contend the current system encourages patent litigation and costly judgments against infringers -- and stifles innovation. They say the proposals are designed to bring patent rules in line with the rapidly changing U.S. economy, where inventions often reflect hundreds of potentially patentable ideas.

Mark Chandler, Cisco's general counsel, dismissed concerns that non-U.S. companies might gain some advantage by the bill. He said the proposed changes would strengthen companies at "the heart of innovation in the American economy," better positioning them to compete at home and abroad.

Opponents of the legislation argue that it would make it easier for foreign competitors to legally copy patented methods and products.

The maneuvering dramatizes how fears about global integration are spreading across many issues.

Such concerns have placed in doubt prospects for President Bush's trade agenda, including market-opening deals with Colombia and South Korea. Renewal of the president's authority to negotiate deals appears even more remote. Democrats in Congress are pushing to shore up programs that help workers who lose their jobs as a result of foreign competition.

The angst about globalization also helped fuel opposition to an immigration-overhaul bill that would have opened a path to citizenship for millions of undocumented workers. It has led Congress to enact rules governing foreign investments in the U.S.

The spillover of those worries into the patent debate "shows the breadth of the concerns about this model of globalization," says Lori Wallach, who heads Public Citizen's Global Trade Watch, an advocacy group critical of the Bush agenda. "It's not just trade agreements any more."

[Big Ideas]

Calls for changes in the patent system have been building for some time and gained traction after Democrats took control of Congress this year. In both the House and the Senate, bipartisan coalitions emerged to take up the issue. And the initiative, with the help of some savvy lobbying by business supporters, appeared on track for passage, despite the partisan-charged political environment on Capitol Hill.

The patent initiative, which has been pushed by the financial-services industry, as well, took an important step forward in July. Both the House and the Senate judiciary committees approved broadly consistent bills.

The White House made clear it was also on board. While raising concerns about some details of the legislation, the Bush administration has offered general support for "the goals" of the initiative.

But the labor-driven pushback gave Democratic leaders pause about rushing action on the legislation before lawmakers left town for the August break. Floor votes in the House and Senate are expected this fall.

From the beginning, the legislation has faced opposition. Pharmaceutical and biotech companies have voiced concern. So have large research universities and many manufacturers, such as Caterpillar Inc. and Dow Chemical Co. They contend that the legislation is too far-reaching and would stifle innovation by weakening the value of patents.

Then came the AFL-CIO. Leaders of the United Steelworkers union and the International Federation of Professional and Technical Engineers, which represents high-tech workers, offered similar concerns. The legislation "could seriously threaten our nation's competitive edge in industries that rely on innovation," Gregory Junemann, president of the engineering group, warned lawmakers in another letter.

At about the same time, criticism with a strong antiglobalization bent began to emerge among rank-and-file lawmakers in both parties. In late July, Reps. Michael Michaud, a Maine Democrat, and Donald Manzullo, an Illinois Republican, circulated a "Dear Colleague" letter noting "foreign competitors" welcomed the legislation. The letter was accompanied by an overseas newspaper story noting that pharmaceutical companies in India saw the legislation as an opening to break patent rights on brand-name drugs and gain an edge in the U.S. market.

"We just couldn't believe it" Rep. Manzullo said. "This is a very serious problem."

Eventually, more than 60 House members joined in an appeal to House leaders in both parties not to rush action. The request echoed of the same language used by the AFL-CIO: "It is especially important that these proposals not undermine our efforts to achieve better intellectual property protection for U.S. companies overseas, particularly in China and India."

Amid the concerns, House leaders backed off of tentative plans to run the measure through the floor before lawmakers left town for the summer.

Rep. Howard Berman, the lead sponsor of the legislation, said it is "hard for me to understand" why the legislation is being seen as hurting the nation's competitiveness. "To the contrary," he says, "it is the weakness and abuses of the current system that are impeding American innovation." The California Democrat predicted the measure will be brought up in September and win approval in the House.

Write to Greg Hitt at greg.hitt@wsj.com



Financial securities and valuations for pharmaceutical research and development - Patent 20030023526

Financial securities and valuations for pharmaceutical research and development - Patent 20030023526: "Described is a financial debt security for the raising of capital for pharmaceutical R&D. Also described is a method of estimating the value of such a debt security. Also described is a method of estimating the value of a pharmaceutical in research and development."

Outsourcing Drug Work -- [ BIOTECH ]: Scientific American

Outsourcing Drug Work -- [ BIOTECH ]: Scientific American: "

Outsourcing Drug Work

Pharmaceuticals ship R&D and clinical trials to India
By Gunjan Sinha

Image no longer available. The full versions of this and other articles from the print edition--including all graphics and sidebars--are available for purchase at Scientific American Digital.
MORE THAN PUSHING PILLS: Changes in India's patent laws are encouraging pharmaceutical companies to conduct research and development there as well as to hold clinical trials.
Girish Virkar doesn't sleep much these days. "I've got a lot to do," he laments, as he settles into a 6 A.M. flight from Frankfurt to Milan. His mission: to drum up business for his company and cash in on the latest trend in outsourcing to India--drug research and clinical trials.

Virkar is CEO of the Mumbai-based D&O Clinical Research Organization--a firm that has been manufacturing precursor drug compounds for foreign pharmaceutical companies for more than a decade. Just this year, however, D&O expanded its services to include support for clinical trials, specifically, coordinating the studies and managing data. The expansion is intended to corral more clients as India's business climate heats up. As part of a World Trade Organization agreement that India signed in 1995, starting next year the country will honor product patents. Pharmaceutical corporations, once fearful of drug pirates, can hardly wait to move in.

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Although pharmaceutical giants such as Novartis, Pfizer and Eli Lilly have commissioned Indian firms to manufacture compounds for years, all R&D work--drug design and preclinical testing--has been done elsewhere. But during the past year, all three have publicly stated that they are actively looking at the Indian market to perform R&D services, asserts Alok Gupta, head of life sciences and biotechnology at Rabo India Finance, an investment bank. "This is a huge opportunity."

The intellectual-property law change will also jump-start growth in the market for the clinical trials, Gupta says. Since 1970 India's patent laws, which recognized processes only, did not necessitate clinical trials. Knock-off artists would study a drug released in the U.S. or Europe, manufacture it through a different process, and then sell the generic for a pittance. Today most of the 20,000 pharmaceutical companies in India make generics, Gupta states: "It has been a situation where there was no specific requirement for clinical testing, so the expertise never developed."

But as foreign companies set up shop in India, expertise will grow. Take Mumbai-based SIRO Clinpharm, one of India's first contract research organizations. It has been performing clinical trial services for the past seven years. Each year business has grown 60 to 80 percent with almost 90 percent coming from international sponsors, says general manager Chetan Tamhankar. With the change in intellectual-property laws, SIRO Clinpharm expects business to "skyrocket," he adds.

Drug outsourcing's biggest plus is cost savings. Pharmaceutical companies spend as much as 20 percent of their sales on research and development. Indian drugmakers spend a quarter as much or less. And clinical trials in India cost as little as 40 percent of those conducted in Western countries, Rabo India Finance reports.

Outsourcing is also more efficient. The German manufacturer Mucos Pharma approached SIRO Clinpharm to find 750 patients to test a drug for head and neck cancer. Within 18 months the company had recruited enough volunteers across five hospitals. In Europe, it took double the time across 22 hospitals to find just 100 volunteers.

Certainly India isn't the only country to which pharmaceutical companies can take their business. "Over the years, we've seen a large amount of data coming in from South America, eastern Europe and China," says David Lepay, senior adviser for clinical science at the U.S. Food and Drug Administration. India does, however, offer a few unique advantages. "You can speak English," notes Enzo Bombardelli, CEO of Milan-based Indena, which develops plant-derived pharmaceuticals. "In Russia and China, you need interpreters. The doctors can read English, but they have difficulties." Indian science and medical students are taught in English.

Another plus is the country's thousands of chemists, nurtured by India's drug copycat industry. "If we give the Chinese a recipe for a compound, they can manufacture it cheaper and faster because they can put more people on it," explains Neil Sawant, associate director of purchasing at Novartis. "But we're not looking for someone to just crank the process." Novartis wants to streamline procedures and develop faster manufacturing methods, too. "Indians are very good in this area," he adds.

Gunjan Sinha is based in Frankfurt. "

Outsourcing Innovation? - Forbes.com

Outsourcing Innovation? - Forbes.com: ",

Can a country outsource innovation? And do multinationals need to spread their research and development across international borders? China may provide an answer to both these questions.

The country needs to move up the technological ladder as its economy gets richer and changes from being driven by low-cost manufactured exports. It needs ideas and entrepreneurs to do that.

At the same time, commercial R&D in high-tech industries is becoming an increasingly global undertaking, with still unfolding economic and security implications. Whereas China accounts for barely 2% of the capital spending by U.S. and U.S.-affiliated companies outside the U.S., in the computer and electronics industries the figure is more than 10%.

In the mid-1980s, China identified information technology as well as biotechnology, space technology, laser technology, automation technology, energy and advanced materials as key areas of expertise it needed to modernize its economy. To get it, the government ended a 30-year-long Maoist ideology-imposed break in sending science and engineering students to the U.S. on state scholarships.

At the same time, the science ministry set up a program to commercialize discoveries made by government research institutes and universities at home.

The program didn't work.

State-owned enterprises remained industrial deadbeats. Private companies relied on a network of overseas Chinese links, mainly in Hong Kong, Taiwan and Singapore, for capital, technology, product design, quality control, manufacturing equipment and raw materials or components.

So China switched gears in the mid-1990s, learning from the way industrializing Japan and South Korea invested heavily in their domestic universities to modernize their economies.

China has more than quadrupled its number of university students since 1998, to 16 million. It now annually churns out 352,000 engineers with at least a bachelor's degree. The comparable number for the U.S. is 137,000.

China still sends its best students abroad for advanced studies. One-quarter of foreign Ph.D. candidates in the U.S. are Chinese. But, like India, China is increasingly luring back those in its academic diaspora, often after a few years of working experience abroad. Beijing says 170,000 Chinese who studied abroad have returned--30,000 of them last year.

This hasn't yet resulted in a stream of world-beating innovations on a commercially significant scale. Chinese companies still come up with clever but imitative products. Their R&D capabilities lag those of Taiwan and South Korea.

One sign of the lack of an innovative cutting edge: In 2004, China was ninth in the country ranking for published scientific papers, but only 124th in the average number of citations per paper.

China also has a widely acknowledged problem with academic "borrowing," up to the point of plagiarism. Emulating the well-regarded work of earlier scholars is a tradition of Chinese academics. It makes many Chinese corporations effective at reverse engineering, but it does not make for much in the way of breakthrough research.

But the country's R&D is getting a keener edge. China has just passed Germany to stand fifth in international new-patent rankings. Last year China spent more than Japan on R&D for the first time, according to the Organization for Economic Co-operation and Development. Only the U.S. spends more. In the last decade, R&D has more than doubled as a share of China's gross domestic product.

Some 250 to 300 multinationals--including most of the world's leading computer and telecom companies--have set up R&D centers in China. Among them are Microsoft (nasdaq: MSFT - news - people ), Nokia (nyse: NOK - news - people ), General Electric (nyse: GE - news - people ), Unilever and Alcatel-Lucent (nyse: ALU - news - people ).

Google (nasdaq: GOOG - news - people ), IBM (nyse: IBM - news - people ), Motorola (nyse: MOT - news - people ) and Intel (nasdaq: INTC - news - people ) will conduct their own research and fund projects at China's leading universities. Those centers support both those companies' worldwide operations and their fast-growing local businesses.

Scientists in China cost less than a third of their counterparts in the West, and China offers tax breaks, construction loans and other incentives to attract Western information technology companies' R&D dollars. But Alcatel, the communications multinational that owns Bell Labs and spends $3.6 billion a year on R&D, says its researchers in Shanghai are generating patents faster than the rest of the company.

The benefit for China is not only a transfer of technology but also that a young generation of its scientists is being trained in the soft skills of managing complex research projects, working with university researchers and collaborating with other companies that have niches of expertise.

Next challenge: Can Beijing augment that by replicating the reverse migration of the scientific diaspora of South Korea and Taiwan? The trick in those countries was to assure that the returnees would be free to exercise both their academic and personal freedoms, including the freedom to get rich.

The opportunity to be an entrepreneur would be a big draw in China, as it lets successful Chinese avoid the glass ceiling of working in multinational corporations. But an emerging entrepreneurial middle class poses a long-term threat to the political authority of the ruling Communist Party.

China needs that entrepreneurial class if it is to foster innovation. Unlike South Korea or Japan, it lacks conglomerates with the size and culture to take R&D chances, such as Samsung and Sony (nyse: SNE - news - people ). In China, the large companies are mostly state-owned and run by risk-averse bureaucrats.

To encourage its entrepreneurs, it also needs to accelerate financial reforms and protections for intellectual property rights. Its current financial system provides scant support to private entrepreneurs, and intellectual property theft, despite increased policing, remains rampant. Strong intellectual property rights in China won't be far behind, once the country has its own IP to protect.

China has also learned a lesson from the U.S.: pour government money into defense R&D, both for its own sake and as an economic catalyst. China "is investing more heavily in the hard science areas that underpin modern defense and commercial activities, whereas the U.S. is investing more heavily in the medical, psychological and social problem science areas that underpin improvement of individual health and comfort," a recent report by the U.S.'s Office of Naval Research notes.

For all the progress it is making in R&D, especially against other developing economies, China still lags developed nations in the quality of its research overall. It is only now establishing the R&D foundation that the U.S., Japan and Europe built years ago, but globalization will help it quicken the process.


Outsourcing Medical Products to Asia

Outsourcing Medical Products to Asia: "
Outsourcing Medical Products to Asia

Published in MD&DI Guide to Outsourcing
By Ames Gross and Rachel Weintraub
August 2005

As competition in the global medical device market intensifies, U.S. medical companies are increasingly seeking out ways to reduce costs in manufacturing, R&D, clinical trials and other medical services. Many Asian countries offer a lower cost of labor (China and India) and skilled labor force. Combining this with the region’s fast-growing economies and quickly aging populations (Japan’s elderly population is currently 19.48 percent, versus about 12.5 percent in the U.S.), these conditions provide promising opportunities for U.S. medical device companies outsourcing to Asia.

Many Asian countries are experiencing increases in Gross Domestic Product (GDP) and overall wealth. In turn, many citizens are demanding higher healthcare standards and services. Most Asian governments are striving to improve their healthcare in order to meet these domestic demands. They are also placing a greater importance on international standards and regulations in order to expand the quality standards of their medical device market.

Following China’s entry into the World Trade Organization, the State Food and Drug Administration (SFDA) has made greater efforts to improve the regulatory environment for medical devices, an industry currently valued at over $3.5 billion in China. The country continues to be a popular destination for outsourcing as it boasts increasingly sophisticated medical product technology and improved product quality.

India has been experiencing 10 to 12 percent growth rate in its medical device market for the past several years. Currently, the device market has an estimated value of over $2 billion. India’s inexpensive labor force and highly-skilled English speakers have attracted many U.S. companies and led to the emergence of numerous Indian outsourcing companies. For instance, Wipro, a very large Bangalore, India company, started out as a producer of vegetable oil in 1945. Today, Wipro functions as an outsourcing company, offering numerous services, such as call centers, high-technology consulting, and manufacturing, including the production of medical devices. In 2003, Wipro nearly doubled its workforce to almost 30,000 and in 2004 the company’s revenue increased to over $1 billion, up more than 40 percent from 2003.

There are numerous reasons for outsourcing manufacturing to Asia. Many U.S. companies choose Asia as a manufacturing location in order to benefit from the reduced labor costs. For example, the salary of a mechanical engineer in the U.S. averages about $50,000 per year, while the same type of position in India would only pay $7,300 per year. Likewise, a project engineer in the U.S. also earns a salary of around $50,000, though a project engineer in India only makes about one-tenth the salary, or $5,000 per year.

Moving product manufacturing to Asia can offer many benefits to U.S. medical device companies. Along with the large and typically highly-skilled workforces that China and India offer, many manufacturers in these countries are paying particular attention to manufacturing standards, such as Good Manufacturing Practice (GMP) and International Organization for Standardization (ISO) guidelines. In China, the government has set up Special Economic Zones (SEZs), which offer significant tax breaks for foreign companies initially setting up an establishment in China. India’s government is also in the process of setting up SEZs, based on China’s system. The Indian government hopes that the less stringent labor laws with help encourage more Foreign Direct Investment into India.

In order to provide a safe, yet low-cost, market for contract research and manufacturing, Indian pharmaceutical companies are becoming increasingly US FDA compliant. There are currently more than 60 FDA approved pharmaceutical plants in India. GMP compliant manufacturing plants number more than 200. These numbers are increasing as Indian companies strive to attract more medically-oriented outsourcing contracts.

Nypro, Inc. (Clinton, Massachusetts), a manufacturer of plastic moldings for various industries including fluid management valves for medical devices, has been benefiting from China’s cheap labor and skilled employees for over thirty years. The company now has over a dozen facilities in China employing around 7,000 people, about half of the company’s total staff. In 2004, Nypro first began manufacturing some of its medical devices at one of its China facilities, hoping to expand its Asia and China market. Currently, Nypro’s medical devices contribute around a quarter of the company’s total annual revenue.

A 50-year old company and producer of plastic components for medical devices, Dielectrics Inc. (Chicopee, Massachusetts), has decided to establish its first facility in China. Dielectrics Asia, a joint venture with a Taiwanese company, is expected to be in full operation in China by the end of 2005. While the company currently employs 250 people at its U.S. office, it plans to hire at least 50 new employees for its China facility. Dielectrics hopes the new JV will expand their Asian customer base throughout China, Taiwan and Japan.

Outsourcing manufacturing has raised strong political concerns about the loss of American jobs. However, in a global economy, it is generally advantageous for companies to perform different tasks in different locations. For instance, in the automobile industry today, various parts are made at different factories and then assembled at one or more locations. To take advantage of lower costs and specialized manufacturing capabilities, more and more medical device companies will eventually follow this trend, too. After all, if one’s competitor is experiencing strong benefits from outsourcing, does that company have any choice if it wants to stay in business?

Research and Development
Over the past ten years, R&D spending has nearly doubled in the medical device industry. Medical device companies are constantly under pressure to keep their R&D expenses in check, and often look to Contract Research Organizations (CROs) in Asia as a cost-saving solution. These R&D outsourcing companies work with U.S. manufacturers to co-develop new medical products and technology.

China and India both offer various R&D outsourcing benefits, as both countries boast a large, well-educated labor force. And now, some U.S. companies are expanding their R&D outsourcing requests and asking for assistance with core concepts and feasibility testing. The growing trend of outsourcing R&D has even led some CROs to establish their own engineering departments, sometimes with dozens of employees. Outsourcing R&D also allows U.S. companies to consider medical device development and technology options beyond their immediate abilities. A medical device company may have limited manpower or facilities for conducting R&D, but can have more extensive R&D work completed by outsourcing to a company in Asia.

In Bangalore, India, Siemens set up a new R&D facility in 2004 to expand their research in the medical and information technology sectors. R&D at this new location, which is the ninth corporate technology facility for Siemens, will include developing user-friendly medical imaging systems. Siemens employs nearly 10,000 people in India, and around 5,000 in R&D across various sectors. Siemens India R&D operations include developing products to meet local and global standards, and creating original products for the Indian market. In 2003 alone, Siemens spent over $6 billion on R&D in India.

Philips Electronics, one of the largest healthcare technology and equipment suppliers in China, has plans to expand their China presence even further by focusing on the rural, western Chinese provinces, which tend to lack adequate medical facilities and supplies. Last year, the company set up a joint venture with Neusoft, a Chinese company (Shenyang, China). The JV will develop and produce x-ray, computed tomography (CT) and ultrasound equipment for the domestic and global markets. The new JV facility currently employs around 500 engineers in the R&D department, and the company expects to double the number of employees over the next few years. Philips has even set up a panel to establish strategies for their China business, which earned revenue of over US$8 billion in 2004, nearly half from domestic sales.

The largest concern of medical device companies outsourcing R&D is intellectual property protection. However, India is making great strides to improve its IP environment and on January 1, 2005, passed a new patent law for pharmaceuticals. A few CROs are even beginning to establish their own IP standards in order to attract more overseas customers.

India’s new patent law will allow for more transparency and security in the country’s pharmaceutical industry, comprised of around 20,000 foreign and domestic drug makers. The Third Amendment Bill will cover all the remaining provisions India must meet in order to comply with the Trade-related Intellectual Property Rights (TRIPs) Agreement, including the granting of pharmaceutical patents. The new bill has two main objectives: (1) to introduce a patent regime for all products, including pharmaceuticals, and (2) to introduce the granting of compulsory licenses. Previously, only methods or processes of manufacturing could be patented for some products in India. Under the new provision, specific product patent protection may be granted in almost all areas, including patent protection for most pharmaceuticals. The Indian Parliament hopes this new Bill will attract more foreign companies to India and encourage those already in India to begin expanding their R&D sectors. Moreover, this new bill is another step closer to patent protection for medical devices in India.

Clinical Trials
Many companies look to India for clinical trials, as the country offers a large, diverse population and varied gene pool. Patient recruitment is often an easier and faster process in India than in the West and companies can save as much as 50 percent in clinical trial costs. Over the past few years, clinical trial spending by U.S. medical companies has been increasing at an annual rate of about 10 percent.

Many multinational pharmaceutical companies currently conduct clinical trials in India, and currently, 75 hospitals in the country are involved in clinical trials. For example, Eli Lilly has held trials for their human insulin and insulin lispro products, which involved over 600 patients in India. Presently, Eli Lilly has close to 20 ongoing clinical research projects and trials in India, located at around 35 hospitals throughout the country.

Pfizer plans to begin clinical trials for a new malaria cocktail drug in India, sourcing around 300 patients from some of the northeastern areas of the country. The pharmaceutical giant is also holding clinical trials for some of their other drugs, including those to treat breast cancer, osteoporosis and schizophrenia. It is estimated that Pfizer has invested over $12 million in clinical trials in India to date.

In January 2005, India’s Ministry of Health and Family Welfare passed the Drugs and Cosmetics Amendment Rules, permitting foreign and domestic companies to conduct clinical trials for pharmaceuticals in India and other countries simultaneously. Previously, a pharmaceutical had to undergo a clinical trial one phase higher in another country first, before the previous trial phase could be conducted in India. Under the new amendment, Phase II and III clinical trials may occur in India and outside of India simultaneously. However, since the purpose of a Phase I trial is to test the safety of the drug, all Phase I trials still have to be conducted outside of India first, before testing the drug in India. This guideline will help protect Indian citizens from being subject to untested and unproven drugs. The Ministry also set up a group to monitor clinical trials in India and ensure that companies comply with Good Clinical Practices. Furthermore, clearances to conduct trials will be granted on a case-by-case basis and foreign companies will not be permitted to conduct clinical trials solely in India. This new amendment demonstrates that India is quickly becoming a common location for pharmaceutical clinical trials, and also serves as an indication that medical device trials may soon follow suit.

Laboratory Services
More and more U.S. laboratories are outsourcing their work to overseas labs and currently, it is estimated that at least 10 percent of all U.S. laboratory work is sent overseas. In particular, many U.S. dental laboratories look overseas in order to reduce expenses and increase productivity. Moreover, in 2004, China’s government passed a regulation classifying dental laboratories as Class II medical device manufacturers. Therefore, all dental labs in China should be registered with the government and must meet specific safety and quality standards.

One Shanghai-based laboratory, DentUSA, (which makes dentures, parts for bridges and crowns, and partial frameworks) has been actively seeking out U.S. customers through various marketing techniques, such as sending out promotional CDs directly to U.S. dental laboratories. Currently, the 300-person laboratory handles around 500 cases per day, with a one-week turnaround (including shipping time). DentUSA offers all the latest technology and ADA- and CE-certified products. The company’s managers, required to speak fluent English and have 15 to 20 years experience working with U.S. labs, train the local Chinese technicians. DentUSA performs work for domestic and international clients, with close to half its business coming from U.S. laboratories.

Healthcare Services
Due to the rising costs of U.S. healthcare and long waiting times for many medical procedures and treatments, some U.S. citizens are looking overseas for medical services. In particular, India’s medical industry offers over 15,000 hospitals, 300 medical colleges and over 1 million physicians. Moreover, it is estimated that India generates an additional 25,000 doctors and nurses each year. The “medical tourism” industry (patients go overseas for cheaper, quality medical services) in India, currently growing at an annual rate of around 25 percent, is predicted to bring in at least $2 billion within the next 6 to 7 years.

Apollo Hospitals Group, based in New Delhi, India, is the largest healthcare provider in Asia. The hospital chain established the first successful liver transplant program and cancer therapy program in the region. Apollo’s cardiac center offers over a dozen state-of-the-art operation rooms and has nearly a 100 percent success rate (so they say) in the 50,000 heart surgeries it has conducted to date.

According to the Confederation of Indian Industry, medical tourism attracted about 150,000 foreigners in 2004. Medical companies in India that cater to foreign clientele generally offer comprehensive packages including airfare, airport transfers, hotels, treatment, and possibly a post-treatment vacation, usually all for less than the cost of the same procedure conducted in the U.S.

For instance, one U.S. patient paid $40,000 for a heart operation and one-month stay in a U.S. hospital. The patient later needed a second heart operation. By traveling to India for the second operation, the cost was $8,000, even including airfare; hence, the patient saved 80 percent. In another case, an uninsured U.S. citizen, was told that heart surgery would cost him $200,000 in the U.S. Instead, the patient elected to have the procedure done at Escorts Heart Institute in India at a cost of only $10,000.

Elective treatment, such as cosmetic surgery, corrective vision surgery and dental procedures, generally not covered by insurance, also attract many Western citizens (U.S., Europe, Australia) to India. Such Western U.S. patients travel to India to benefit from the significantly lower costs, highly-skilled physicians and state-of-the-art medical equipment. Moreover, some U.S. insurance companies, such as Blue Cross Blue Shield, have begun collaborating with some hospitals in India.

More and more U.S. medical companies are outsourcing to Asia each year. Not only can these companies reduce expenses, but they may also benefit from Asia’s fast growing economies and medical markets. While IP and manufacturing standards, such as GMP, can still be issues, some U.S. companies still outsource some aspects of their business. Moreover, Asian countries such as China and India are constantly striving to raise their medical device standards and regulations in order to attract more foreign companies. In April 2005, India and the U.S. even signed an “open skies” agreement, deregulating flight restrictions and allowing for increased air travel between the two countries. As long as Asian countries continue to offer advantages, whether by improving production, efficiency or reducing costs, U.S. medical companies will continue to outsource to Asia.