Thursday, November 17, 2005

Niche Dominance, Margins, & the Drug Industry

There's no mystery to it.

The higher your margins, the more profit you bring back to your business.

Unless you're Walmart (WMT) -- who can harvest the fruit created by fast asset turnover -- low margins spell death.

In case you ever wondered why drug stocks make great investments, consult the mind blowing article on Genzyme (GENZ) in Wednesday's Wall Street Journal.

We recently wrote about the power of niche.

What does it mean to dominate a particular space in a given market?

Niche means thinking of Coach (COH) when you want that fancy handbag, or running over to Whole Foods (WFMI) when you have a craving for over-priced tofu.

Niche players fill the void created by leaders.

Illustration: Symantec (SYMC) is who is you go to for anti-virus security, but who do you go to for something like Web filtering?

The answer is a niche player like Websense (WBSN).

Genzyme covers the ground gargantuan, cholestrol-focused megacaps like Pfizer (PFE) cannot.

Genzyme sells Cerezyme, a drug treatment for Gaucher's disease.

Gaucher's disease is an extremely rare condition afflicting less than 10,000 Americans.

Because it has virtually no competition, Genzyme pretty much charges as much as it possibly can for the drug.

Genzyme does the same for high-priced kidney drug Renagel.

Unsurprisingly, the exhorbitant costs of these drugs have instigated a whole rash of controversy.

But if you're going to invest in biotechs, you need to put on your Wall Street hat and remind yourself that you don't work on Capitol Hill.

Cerezyme rang in over $800 million dollars of revenue last year and 90% profit margins.

Investing in biotech doesn't have to be tantamount to buying a lottery ticket.

Nor does it have to create an avalanche of guilt.

Just look at Genzyme's return to investors over the last 12 months.

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