One "Must-Do" Investment for 2007
By Rob Fannon, editor, Phase I Investor
January 19, 2006

You couldn't have asked for a better "buy" signal...

Last year, a group of the most powerful investors in the world announced their intention to make one of the market's most ignored sectors their top investment priority in 2007.

It's not the hedge-fund or mutual-fund industry, although they're interested in the sector, too. It's a much different crowd... one that has more of a direct impact on the targeted industry. The group I'm referring to is the world's largest drug makers, collectively referred to as "Big Pharma."

Their target is the biotech industry.

If you're not familiar with biotech medicines, you should be, as they differ greatly from traditional chemistry-based medicines. Biotech medicines are displacing traditional drugs because they work much better. They work better because they're built with a rational design... based on how the body works.

To put it simply, the future of medicine is biotech. Four of the top five drug companies in the world have identified biotech as the center of their strategic focus for 2007.

In fact, the CEOs of two of these companies, Pfizer and Merck, have publicly stated desires for their companies to become the top biotech company in the world within a few years. To reach the top spot, these companies will have to spend many billions of dollars in research and acquisitions.

Naturally, all of this translates into the prospect of huge returns for biotech investors in the near term, beginning this year.

In 2006, Big Pharma and biotech reached more than 230 deals – up 32% from 2005. And the transactions were 20% richer for the biotechs, a sign of increasing leverage for the smaller parties at the negotiation table. There were also 10 acquisitions on the year – a record number.

Buyout premiums were up, with an average of 62% per deal. Yet, many of these buyouts took place at payout premiums greater than 100%. For example, one of our Phase 1 Investor holdings, Sirna Therapeutics, was acquired by Merck for $1.1 billion. The acquisition resulted in an immediate 100% gain.

The increased merger and acquisition trend that took off last year will certainly continue into 2007. The big drug companies continue to face eroding sales from blockbusters coming off patent and ensuing generic drug competition.

Pfizer stands to lose half of its $50 billion revenue to generics in the next five years. Merck lost $3 billion this year alone when Zocor, the cholesterol drug, came off patent. Big Pharma will continue to be forced to turn to the biotech sector in search of new products to replace eroding sales.

Here's why Big Pharma is turning to biotech:

Almost every big drug company has laid out cost-cutting tactics in their budget plans for the upcoming year. Pfizer, for example, plans to cut 20% of its sales force.

Still, the Big Pharma coffers are chock full of cash, and a good chunk of that money will be flowing to biotech this year. Investing alongside them will be one of the smartest things you can do with your money in 2007.

Editor's note: Rob Fannon is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

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