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Stem cell stocks take a beating
Kerry defeat a big setback despite California proposition; are they down enough to be attractive?
November 4, 2004: 11:20 AM EST
By Jacqueline S. Gold, CNN/Money contributing writer

NEW YORK (CNN/Money) - John Kerry's defeat in the presidential election is battering companies involved in stem cell research -- despite passage of a California ballot proposal that would aggressively fund work on embryonic stem cells.

Ronald Reagan's battle with Alzheimer's Disease helped boost support for stem cell research  
Ronald Reagan's battle with Alzheimer's Disease helped boost support for stem cell research

Menlo Park, Calif.-based Geron Corp., the poster child for firms trying to extract drug therapies from stem cells, lost 12.3 percent Wednesday while StemCells Inc., a smaller, Palo Alto firm operating in the same space, tumbled 23.6 percent.

And Ann Arbor, Mich.-based Aastrom Biosciences Inc., which is trying to restore bone tissue using stem cell therapy, sank 15.8 percent.

Geron (Research) stabilized Thursday but StemCells (down $0.27 to $2.87, Research) and Aastrom (down $0.12 to $1.05, Research) both tumbled further.

It wasn't supposed to be this way.

In the month before the election, the stem cell stocks were soaring, and not only because Sen. Kerry -- who promised to lift restrictions on stem cell research imposed by the Bush administration three years ago -- appeared to be gaining momentum.

Another powerful boost came from Proposition 71, a California ballot initiative that would pump $3 billion into stem cell research over a 10-year period. Republican Gov. Arnold Schwarzenegger, breaking with most of his fellow party members -- including the president -- came out in favor of the measure in October.

Californians overwhelmingly supported the proposal at the polls, inspired partially by the recent deaths of former president (and former California governor) Ronald Reagan, who suffered from Alzheimer's, and actor Christopher Reeves, a paralysis victim.

But Tuesday's passage of Proposition 71 was not enough to save the stocks on Wednesday.

"People were expecting a double victory," said Matthew Patsky, a portfolio manager at Boston-based Winslow Management, which specializes in small-cap growth stocks. "Even though $3 billion is a meaningful amount of money, there was disappointment over the idea that there would be no federal funding."

Investors interested in biotech shares are better off with stocks in more established firms, which have products that will come to market in the next 12 to 18 months, advised Robert Leboyer, a senior biotech analyst at New York brokerage EKN Inc.

The stem cell companies are not going to show real scientific progress for at least another four to seven years, he said.

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Leboyer prefers Amgen (Research) and Genentech Inc. (Research), which both rallied Wednesday on news that there will be no reductions in Medicare reimbursement rates for their big cancer drugs. Amgen was little changed and Genentech gave back a bit of ground Thursday.

He also likes Vaxgen Inc. (Research), which trades on the pink sheets and has produced an anthrax vaccine. Vaxgen will find out this Friday whether it will get an $890 million federal contract to provide the government with 75 million does of its vaccination.

Leboyer breaks down biotech stocks into three categories.

The first tier, he said, includes companies that already have products on the market that generate real earnings and cash flow. The second tier is composed of companies with products in late-stage clinical trials awaiting data on whether their treatments will succeed or fail in the next year or 18 months.

Stem cell firms fall into the third tier, he said. These are companies that do basic research, or are in early stage trials.

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"The biggest mistake the individual investor made in 1999 and 2000 was to think this stuff is easy," said Winslow's Patsky.

"But biotechs are very volatile. It's a field that's hard to understand. Unless you are an expert in it, it's impossible to tell the frauds from the real thing when these companies are in the development stage."

Christopher Raymond, a biotech analyst with Robert W. Baird & Co. Inc., heartily concurred.

When it comes to the stem cell companies, "there are an awful lot of scientific hurdles to get through," he said.

"Just because California throws a lot of money at stem cell research doesn't necessarily mean it's going to produce breakthroughs. For the average investor, it's a bad idea to buy a stock simply on a legislative move."  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.