NEW YORK (CNN/Money) -
Biotech stock prices surged after Senate Majority Leader Bill Frist stated his support for a bill that would provide federal funding for stem cell research, but analysts urged investor caution even as they hailed the good news.
"This news is driving investor interest in the area," said Mark Monane, biotech analyst for Needham. "My caution is that it's still emerging and it's hard to tell who is going to be the winners. I don't like people buying on the hype."
Tennessee Republican Frist, a heart and lung replacement surgeon, said Friday that the federal government should fund embryonic stem cell research. Not only does this break from Frist's previous statements on the issue, but it breaks with President Bush, who has vowed to veto the bill.
Stock prices for Stemcells Inc. (up $0.87 to $6.10, Research) soared nearly 23 percent following the news, while prices for Aastrom Biosciences Inc. (up $0.16 to $3.19, Research) jumped nearly 10 percent,Geron Corp. (up $0.74 to $10.95, Research) rose more than 8 percent and Viacell Inc. (up $0.35 to $8.54, Research) rose more than 6 percent.
But will the good times last? Monane said the biotechs are "still very far" from developing revenue-generating therapies in the stem cell area.
"It's exciting and the potential is enormous, but the challenges and the risks are formidable," said Monane.
Researchers hope that stem cells could be used to heal grievous injuries to spinal cords, kneecaps and brains, as well as reverse the effects of Alzheimer's disease and rebuild the pancreas in diabetics.
Ren Benjamin, biotech analyst for Rodman & Renshaw, said that investors should bear in mind that the biotech sector ebbs and flows with the headlines.
"Investors should be aware that biotech companies, especially in the stem-cell space, tend to move with the news flow," said Benjamin. "If there's bad news, like if Bush vetoes this bill as he promised he will, the prices could go back to more reasonable valuations."
Benjamin, who rates Aastrom and Geron as "hold," said the companies were fairly priced before Friday's surge.
"A lot of biotechnology companies are in the research and development stages," said Benjamin. "From a fundamental point of view, investors need to look at valuation and calculate the potential for success with any therapy."
Geron's work in cell growth would benefit the most from advances in stem cell research, analysts said, because the company could develop products that could work with stem cells to regenerate damaged tissue. Aastrom, Stemcells and Viacell don't use embryonic stem cells, focusing on adult and umbilical stem cells instead. However, advances in one area of stem cell research could draw investors to the entire sector.
The analysts do not own stock in the companies mentioned here. Needham has an investing relation with Geron. Rodman & Renshaw may have conducted banking with Aastrom.