Bill Stirling's World Report
Bill Sterling is Global Strategist for C.I. Global Advisors LLP, who are one of the fund managers for C.I. Mutual Funds. His reports are interesting and timely, especially for anyone interested in the larger global picture and how it may affect their investments. See our links page for links to C.I. Mutual Funds and other featured mutual funds. His recent book, "Boomernomics", is highly recommended.

Biotechnology: The Mother of all Technology revolutions?

"With the tools of regenerative medicine that will become available in the 21st century, today's leading killers--heart disease, cancer, Alzheimer's and the aging process itself--will become distant memories of the species."

--William Haseltine, CEO, Human Genome Sciences

"What's going on [in the life sciences] offers the promise of curing disease and growing more and better food on land in a more sustainable way."

--Robert B. Shapiro, Chairman, Monsanto

A major technology revolution is brewing. Amid the intense search on Wall Street for the next hot .com company, a growing contingent of innovative firms are working around the clock to fundamentally change medicine, health care, and agriculture.

The recent launch of the C.I. Global Biotechnology Fund gives us a good opportunity to explore the case for investing in the life sciences sector. In this month's report, we address the outlook for the sector and discuss why we think the biotechnology revolution could be the mother of all technology revolutions.

Gene Dreams

In our book, Boomernomics¨, we noted that the rapid growth of the Internet has made many investors increasingly aware of the potential for the technology revolution to transform the global economy. We also pointed out that another revolution was brewing in the life sciences, one that also has its roots in quantum physics and the laws of the microcosm. This revolution is still in its infancy, but scientists tell us that the accelerating pace of innovation in the life sciences could result in truly stunning advances in medicine, health care, and agriculture in the years ahead.

The foundation of the life sciences revolution is the convergence of information technology, biology, and medicine. High-speed computers and advances in semiconductor chips and software are allowing researchers to explore the depths of human and plant cells. Today, many biologists envision a day in the not-too-distant-future when the complete genome sequence of their favorite organisms will be available in electronic databases. Meanwhile, medical researchers are using the new knowledge of the human genome to create powerful new drugs and gene therapies.

Investors looking for signs of an emerging revolution need look no further than the Human Genome Project, an international collaboration devoted to the discovery of the complete sequence of the chemical bases in human DNA. As the Chart below shows, over 30,000 of the estimated 60,000 to 100,000 genes that comprise a typical human cell have been decoded.

How big a task is the Human Genome project? According to researchers, there are some three billion pieces of information specified by the letters A, C, G, or T that make up the genome. That's enough information to fill hundreds of Manhattan telephone books. Scientists' ability to decipher the code of life has been accelerating in recent years and, as a result, researchers now confidently predict that the entire human genome will be decoded by the year 2003, well ahead of schedule.

A New Era of Medicine
and Agriculture

There is little doubt today among leading analysts that a complete mapping of the human genome, along with the complete mappings of key plant genomes, will lay the foundation for a new era in health care and agriculture. The beginnings of the new era are already visible today.

For example, physicians today are using DNA to grow blood vessels and treat vein grafts, methodologies that could be used to replace traditional bypass surgery in the future. New treatments for arthritis, asthma, osteoporosis, various forms of cancer, and multiple sclerosis are on the horizon. Scientists have even cultivated cells at the root of human life.

There are nearly 100 biotechnology drugs on, or coming on, the market. Furthermore, it is estimated that there are over 1,200 biotech drugs in clinical trial phases, up from 700 last year. As the Chart below shows, the number of drugs in the pipeline has accelerated as knowledge of the human genome has increased.

Amid the rapid pace of innovation in the life sciences, traditional pharmaceutical companies are in the process of revamping their drug development strategies. Genomics promises an exponential jump in the number of drug targets and the number of insights. According to researchers at Bristol-Myers Squibb, almost 60 per cent of their new drug targets come from genomic databases. Researchers at Pfizer currently have about 500 targets that could become important drugs in the future.

Just as the pharmaceutical industry has embraced the new tools of bio-technology, agricultural companies have accelerated their adoption of life science technologies to be used for the creation of novel agricultural products. Farmers note today that current developments are the most important since hybrid corn, which led to the green revolution in the 1950s and 1960s--a period when crop yields soared and hundreds of millions of people were saved from starvation.

All told, significant portions of the global economy are changing as biotech, chemical, pharmaceutical, and agribusiness companies invest in molecular technologies. Consolidations in the forms of acquisitions, mergers, and alliances continue to be a dominant feature of the sector. For example, in the agro-biotechnology industry, more than 25 major acquisitions and alliances valued at $15 billion have taken place since 1996. As the life sciences industry evolves, we would expect to see more such consolidations.

Early Days

The accelerating pace of discovery in the life sciences promises to make it one of the leading sectors in the next millennium. The potential is huge. Sales of biotechnology drugs totalled only $13 billion in 1998--a fraction of the $300 billion spent on pharmaceuticals. Moreover, the entire market capitalization of publicly traded U.S. biotech stocks is roughly $120 billion-the equivalent of one pharmaceutical stock, Johnson and Johnson.

Meanwhile, transgenic (genetically modified) crop sales were $1.35 billion last year, up from $235 million in 1996. Analysts estimate that transgenic crop sales will triple by the year 2000 and grow to $20 billion by 2010. In 1998, nearly one-third of U.S. planted soybean, corn, and cotton varieties were genetically engineered. In future years, these figures are likely to rise sharply.

Investors in biotechnology stocks have seen their share of volatility over the past decade. The enthusiasm of the early 1990s gave way to disappointment and frustration as many companies failed to live up to investors' expectations. Like any growth industry, it is not uncommon for investors and analysts to overestimate the potential of a new technology in the short run. It may take years, and perhaps decades, for a new technology to enter the take-off phase of its life cycle (see: Navigating Technological Innovation: S-Curves Ahead, July 1999 Perspective).

While the fruits of the biotechnology revolution are unlikely to be realized in the next year or two, prospects for the near term are improving. Add to this an accelerating pace of innovation in the sector and it is possible to develop a convincing short-term investment thesis.

In sum, we believe there will be major investment opportunities in biotechnology in coming years. However, it is still early. Our view is that the biotech sector is roughly at the stage of development of the the semiconductor industry in the early 1970s.

Prospective investors should be aware of the relatively high risks associated with the sector. We would not recommend putting grandmother's entire retirement nest egg in this industry. In our view, biotechnology stocks are better suited to investors with an appetite for risk and a longer-term investment horizon.

It all may sound a bit like science fiction, but science fiction is becoming science fact. In the immortal words of Star Trek physician Dr. McCoy, "It's life Jim, but not as we know it."

We hope you enjoy the rest of the summer!