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News > Companies
Boom time for biotech
February 22, 2000: 4:26 p.m. ET

After several sluggish years, Wall Street is wild again for biotech stocks
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - Twice in the 1990s, investors fell head over heels for biotechnology stocks, infatuated with the promise of miracle breakthroughs to treat cancer, heart disease and other deadly maladies. Now - buoyed by a new wave of scientific advances and a maturing of the industry -- Wall Street has fallen in love again.
    During the past few months, stocks in biotech companies have roared as investors have snatched up shares of virtually any name attached to the sector. Individual investors who may have been introduced only recently to concepts such as "genomics," "gene expression," or "single nucleotide polymorphisms" today are placing big bets on the future of these complex technologies.
    The Nasdaq Biotech Index, which is made up of more than 200 U.S. and European companies, jumped about 100 percent in 1999, and has gained as much as 60 percent this year. Even with recent profit-taking over the past few days, many biotech stocks are still up three or four times - or even more - over their trading prices only two months ago.
    "2000 is going to be the year of the biotech," said industry analyst Alan Auerbach, of First Security Van Kasper. "I think investors are extremely excited about the scientific breakthroughs going on in the field, and they are showing that with their dollars."
    
What's behind the boom?

    Companies involved in all aspects of genomics, the study of the structure and function of human genes, have soared to especially lofty heights, creating an excitement bubbling throughout the entire industry about the future of drug discovery.
    Genomics-related companies went on a tear Jan. 10 when Celera Genomics (CRA: Research, Estimates), of Rockville, Md., announced it is on track to map the entire human DNA sequence by year's end - a watershed event that would come years ahead of parallel efforts by the publicly-funded Human Genome Project.
    
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    Scientists say that the charting of the human genome - the entire sequence of 3 billion chemical pairs that make up human DNA -- will give them the genetic blueprint to understand why people are predisposed to certain diseases. Eventually, scientists hope, this knowledge will allow them develop innovative treatments for a variety of ills.
    "I think it's really coming home to investors that genomics is really going to affect their lives in the future in a big way," said Roy Whitfield, CEO of Incyte Pharmaceuticals (INCY: Research, Estimates), a Palo Alto, Calif.-based genomic information database firm. "The amount of information that people are getting about the sector is far greater than it ever was."
    The sector got another boost last week after Human Genome Sciences Inc. (HGSI: Research, Estimates) of Rockville, Md., announced it had patented a gene involved in the transmission of HIV, the virus that causes AIDS. While other companies also are working on similar targets, investors wowed by genomics took this development as particularly bullish news - sending the entire sector higher, said Jim McCamant, editor of the Medical Technology Stock Letter.
    Meanwhile, investors also have seen the introduction of several successful biotech-based drugs on the market, such as Immunex Corp.'s (IMNX: Research, Estimates) arthritis drug Enbrel; Genentech Inc.'s (DNA: Research, Estimates) Herceptin, a gene-based therapy for treatment of breast cancer, and Synagis, a child respiratory illness drug made by MedImmune Inc. (MEDI: Research, Estimates).
    More companies are also beginning to turn a profit, giving the sector increased credibility and sparking bigger institutional investments. Analysts also say the industry's pipeline is richer than ever with promising new drugs. Unlike earlier biotech boom times in 1991-92, and again in 1996 -- when investors were largely buying into the hope of new kinds of drug development -- many companies today have shown actual results, Auerbach said.
    "Now you've got a different paradigm. Before, the only real biotech successes were Genentech and Amgen; now you've got a lot of companies out there that have been extremely successful," he said.
    Overall market conditions also are propelling more money into biotech. The biotech sector is relatively immune to the effects of an interest rate increase - unlike the big-cap pharmaceutical makers -- leading many investors to funnel their money into the sector as the threat of more rate hikes by the Federal Reserve looms.
    
Speculative investing

    Industry observers say this latest biotech craze has more than a few parallels to another recent investment phenomenon: Internet stocks. As the gains from many Internet investments have tempered, people who have become comfortable with extreme market volatility and speculative investing in young "dot-com" companies are now placing their bets on biotechnology.
    "There's a large amount of investors out there just wanting to be in biotech," said Sushant Kumar, who follows biotech stocks at Mehta Partners. "This is extremely new - a lot of money from Internet investments has come pouring in."
    Beyond Internet-like stock valuations, biotech companies also are beginning to resemble high-tech firms in how their businesses work -- as companies involved in deciphering DNA are relying on supercomputers and cutting-edge computer-chip technology. Many genomics companies have nothing to do with bringing drugs to market at all - instead, they are building massive databases of genes that they then will license to drug development companies.
    
IPO isn't just for Internet

    Another factor behind the sector's explosive growth is the success of several recent biotech IPOs. Over the past few months, new issues, including Caliper Technologies Corp. (CALP: Research, Estimates), Maxygen Inc. (MAXY: Research, Estimates), Tularik Inc. (TLRK: Research, Estimates), Diversa Corp. (DVSA: Research, Estimates) and Sequenom Inc. (SQNM: Research, Estimates) have soared in their Wall Street debuts.
    As a result of their success, other companies have renewed plans to go public this year.
    "What happened is we went through a long period that was very difficult for biotech companies to raise money," said McCamant. "Once this window opened, a lot of people decided that they would go ahead."
    For all of 1999, only 13 biotech companies went public, down from 21 in 1998, according to Thomson Financial Securities Data. The biggest year for biotech was 1996, when 110 companies raised about $3.1 billion from their public offerings. Analysts say that if biotech companies keep up the pace indicated by IPO filings so far this year, 2000 could be the biggest year for the biotech IPO market in history.
    Among the companies that have recently filed to go public are: genetic data research firm Exelixis Inc.; Lexicon Genetics, a gene discovery company; Genomic Solutions Inc., which uses biochips to compare gene activity in human cells; and drug developers Adolor Corp. and Praecis Pharmaceuticals Inc.
    
The bubble effect

    But will this latest boom last? Some observers say many biotech stocks have soared to dizzying levels, fueled by eager investors who might not have a clear understanding of the sector's complexities.
    For many companies, "the market caps are not justified, but that doesn't mean that all of the stocks are overvalued," said Kumar. "We probably need to look at it on a company-by-company basis, or on a sector basis."
    Like the Internet, many biotech companies are difficult to value - because their product is so information-based and difficult to quantify. Analysts also point out that while genomics companies are rushing to provide gene-discovery tools and patent their findings, a genomics-based drug is years away from coming to market.
    "Whether or not genomics ends up increasing the efficiency of drug discovery is not something you'll know for several years," said Auerbach.
    Still, Auerbach sees biotech stocks -- and genomics companies in particular -- rising ever higher this year. "I would expect it's going to be a bumpy ride, but looking at the entire year, you'll see the sector up as a whole," he predicted.
    Investors should be extremely picky about stocks in the biotech sector, particularly in the genomics field, Kumar said, and he advised investors to look for innovative companies who go beyond a "me-too" approach to technology.
    "I think we are going to see a correction, but I don't think at this stage it's going to be anything major or drastic," he said. But "there is going to be volatility." Back to top

  RELATED STORIES

Genentech 4Q on target - Jan. 20, 2000

Sequenom IPO up 200% - Feb. 2, 2000

Wall St. keen on genes - Dec. 13, 1999

Health funds bolt out of the gate - Jan. 17, 2000

  RELATED SITES

Exelixis

Sequenom

Human Genome Sciences

Celera

Tularik

Incyte Pharmaceuticals

MedImmune


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