Hambrecht & Quist
18th Annual Healthcare Conference

On the road for Info.Resource, publisher of Oregon-Bioscience.com

At the cutting edge of the new economy: Chase Hambrecht & Quist

By Lorraine Ruff and David Gabrilska, Partners
Milestones, the critical thinking company
Seattle, WA

At a time when the combined market cap for life sciences companies - pharmaceuticals, biotechnology, medical devices, health services and eHealth - is at $600 billion and climbing and when the average stock appreciation for those companies in the last 12 months is 109 percent, the 18th annual Chase Hambrecht & Quist Healthcare Conference opened in San Francisco on Monday to 4,000 attendees.  During that 18-year period the NASDAQ composite increased from 251 to 4049.

Americans have very high expectations for those engaged in the research and development of drugs and devices.  In a recent survey, among 18 to 65-year olds, respondents were asked what's ahead for a baby born on January 1, 2000.  More than 50 percent reported that they expected significant advancements in medicine, with 79 percent predicting a cure for cancer and AIDS.  More than 50 percent stated that they expected humans would be cloned.

Biotechnology is one generation - 20 years - old.  In that time there's been explosive growth, health care reform and the commercialization of applied technologies that have fundamentally changed the way we diagnose, treat and prevent disease.  The industry has also experienced significant ups and downs, the near re-invention of the venture capital community, and massive merger and acquisition activity.

This time last year, nearly all the gains - money raised and valuation -- were posted by only 10 biotech companies, one-half of one percent of all biotech companies.  The rich got richer.  This year, more than 100 companies participated in significant gains.  So what's going on? The significant increases in the stock markets are the primary sources for the improved health of biotechnology, but there are other less quantitative factors at work:

In part it's related to "momentum" investors who are looking beyond e-commerce companies for opportunities to score big.  With the near completion of the sequencing of the human genome and sequencing of human chromosome 22, there's been a lot of media coverage of the benefits that will shortly accrue as a result of applied genomics.  Investors may be reacting to the herd mentality, investing money based on hope, hype and glitz.

We can look to the Internet sector for insights.  As Chase Hambrecht & Quist chairman and CEO William B. Harrison observed in his keynote remarks, underlying the glitz may be an emerging trend whereby "legacy" companies - the ones with traditional operating strategies, bricks and mortar -- acquire (or in the case of the $350 billion AOL-Time Warner deal announced Monday be acquired) - the means by which they remain relevant and competitive into the 21st century.

"Legacy companies have given us proven products and services, financial strength and powerful brands," Harrison said, adding, "there's an e-line with legacy companies below it and net services companies above," [companies without the constraints of the past] who focus on eyeballs and mindshare.   These companies all have one thing in common:  they drive down the costs of legacy-based companies.  The analogy is similar to the impact of mechanical genius during the industrial revolution.  This time the product is information," he said.  "These companies are at the cutting-edge of "the new economy."

The recent acquisition of Hambrecht & Quist -- one of the world's most successful investment banks -- by Chase -- one of the world's most successful commercial banks -- is an excellent example of this 21st century synergy.

"In like fashion, Big Pharma needs biotech," said Dennis J.  Purcell, managing director and global head of Chase Hambrecht & Quist Life Sciences.  For example, SmithKline Beecham has stated it counts on alliances with Phase I & II biotechnology companies.  Johnson & Johnson had more than 16 compounds that each accounted for more than $100 million in sales in 1998, half of which were in-licensed.  And Eli Lilly recently announced that alliances are one of the cornerstones of its future success.  However, Purcell reported that there were other reasons for the rebound.

The public equity markets re-opened for biotechnology as investors were encouraged by improved regulatory success rates and attractive valuations.

Biotechnology companies and the FDA continue to work effectively with one another throughout the discovery process.  This has resulted in increasing visibility and timely approval.

Increased large biotech/small biotech alliances as Big Biotechs continue their evolution toward becoming Big Pharmas.

Increased alliances between Big Pharma and biotech companies increased as Big Pharma moved increasingly from "Buy" to "Rent." For example, in 1998 there were 221 collaborations between biotechnology companies and Big Pharma amounting to $3.7 billion.  By comparison, in 1999, there were 477 deals amounting to $3.8 billion.

Genomic information drove the drug discovery process and significant interest among investors.

Looking forward toward 2000, Purcell says he expects:

Continued cooperation between the drug development industry and the FDA.

The pharmaceutical industry will continue to rely on biotech for growth.

Private equity will represent a solid alternative for companies.  There may be a return to cash-based transactions as companies seek to reduce dilution and preserve value for their shareholders.

A continued acceleration of sequencing of the genome and development of the products that will emerge from this fundamental database.

Drug prices and Medicare reform are key issues in the presidential election.

For several years Chase Hambrecht & Quist has shaped what it characterizes as the convergence of the Internet and healthcare.  They strongly endorse the notion that the use of the Internet will change the face of healthcare, and judging from the number of eHealth companies they've nurtured and taken public - drKoop.com with a first year market cap of nearly $600 million - they are clearly walking the talk.  Numerous factors are driving it:

"Internet use continues to grow worldwide in large part due to people who are taking more responsibility for their own health and prevention," Purcell said.

"For example, two-thirds of Internet users retrieve healthcare-related information when they go on-line.  The percent of investors trading securities on-line has nearly doubled to 18 percent in 1999.

"Trading gains from Internet investments are increasingly finding their way into the biotechnology sector as the Internet softens," he said.  "Retail investors are moving more heavily into biotechnology stocks with more positive flow and increasing market capitalization.

But he warned that with all the interest in biotechnology, there will also be increased stock volatility.

The trading we're seeing, particularly among momentum investors, is not based upon traditional investment fundamentals, and this could be both stimulative as well as problematic.  But for now, everyone seems content to ride the wave."

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