|
Is the biotech party over?
|
 |
March 31, 2000: 12:45 p.m. ET
After an unprecedented run-up in biotech shares, investors are getting cold feet
By Staff Writer Martha Slud
|
NEW YORK (CNNfn) - For the past few months the strategy for investing in the biotechnology sector was pretty simple -- "Buy any stock," said Warburg Dillon Read investment banker Eric Roberts.
Since late last year, biotech has been the prince of the stock market; transformed after years as an unpopular and neglected toad. The once-languishing stocks were catapulted to unprecedented levels, which helped to propel the Nasdaq composite index above 5,000 points for the first time in its history earlier this month.
Many investors - shuffling money out of the topsy-turvy Internet sector and poorly performing old-line pharmaceutical stocks -- poured huge sums into young biotech companies with little in the way of profits or revenues but which instead offered grand promises of a new era of high-tech medicine. Venture capitalists also took a new look at the sector, and as a result the biotech IPO market - which virtually slowed to a halt over the past few years - began to come to life.
But now, some experts fear that the boom may be a bit short-lived.
Over the past few weeks, biotech shares have dropped sharply - though most are still well above the levels they traded at last fall. The Nasdaq Biotech Index, which tracks the performance of about 200 companies, has slipped about 32 percent from its all-time high set in early March, but the index is still up about 50 percent today from where it was Dec. 1.
Meanwhile, the latest batch of initial public offerings - launched by companies that rushed to market following the stellar debuts of new issues such as Diversa Corp. (DVSA: Research, Estimates) and Sequenom Inc. (SQNM: Research, Estimates) just a few months ago - have performed sluggishly.
Several companies were slated to debut on the market this past week, but some delayed their offerings amid the sector's continued downturn while others generated little excitement when their stocks began trading. Shares in one newly public company, drug developer Allos Therapeutics (ALTH: Research, Estimates), are trading about 25 percent below their opening price of $18 Monday. Other companies planning follow-on offerings, such as Lynx Therapeutics Inc. (LYNX: Research, Estimates), withdrew their registrations, citing difficult market conditions.
 A capricious market
Industry analysts say the stock market - and the biotech market, in particular - is extremely unstable, and that investors may be in for a rough ride.
"Unfortunately the bloom came off the rose a little bit," Roberts said at this week's BIO 2000 gathering in Boston, a meeting of more than 9,000 industry executives, scientists and venture capitalists sponsored by the Washington-based Biotechnology Industry Organization.
"A correction of some of the stocks in the highflying sector has occurred," he said. "People are now trying to figure out whether they have corrected enough."
Many companies planning to go public are rushing to get their deals completed, fearing that Wall Street may close the window on biotech IPOs in the wake of current volatility, Roberts said.
"They're trying to get these deals done before the momentum slips away," he said.
The biotech bull market began raging late last year, sparked in large part by the announcement by Rockville, Md.-based Celera Genomics (CRA: Research, Estimates) that it was nearing completion of the mapping of the entire human genome.
This scientific breakthrough is expected to create a sea change in drug development, enabling researchers to better understand the structure and function of human genes and ultimately develop new drugs that better target diseases at the molecular level.
Celera stock, along with others in the feverish genomics field, took off, as did almost everything else connected to biotech, from big-cap biotech veterans such as Amgen Inc. (AMGN: Research, Estimates) and Biogen Inc. (BGEN: Research, Estimates), to hot genomics plays such as Incyte Pharmaceuticals (INCY: Research, Estimates), Millennium Pharmaceutical (MLNM: Research, Estimates) and Myriad Genetics (MYGN: Research, Estimates).
Myriad's performance over the past year encapsulates the turbulent biotech boom: Shares in the money-losing company traded at about $8 for much of 1999, then surged to as high as $232.12 earlier this year before falling back to about $50.
For many investors wowed by the technology revolution promised by the Internet, biotechnology and genomics seem to promise a revolution in health care.
"It is going to change health care - we can't describe exactly how that's going to happen, but I think most of us have a feeling that it is going to change health care in this country and throughout the world," said Mary Ann Gray, chief biotech stock picker at the Kaufmann Fund. "People who saw that happen with the Internet saw that happening in genomics, and helped drive up those companies."
But despite the high expectations, things have gone somewhat awry. Over the past few weeks, investors have become increasingly jittery about patent issues, valuations and whether many of these companies will be able to profit from their scientific innovations.
Scientists and company officials at the BIO gathering said that while the mapping of the human genome is a major development, it will likely take years to see tangible results in terms of new drugs on the market.
Experts also say the biotech wave has been largely momentum driven, fueled by investors with an unsophisticated understanding of this complicated sector. After hitting new highs, biotech stocks plummeted earlier this month following comments by President Clinton and British Prime Minister Tony Blair on making genetic data freely available. Industry observers said the remarks in fact underscored genomics companies' plans for their data, but that the two leaders' confusing statements spooked uninformed investors.
Not the first boom
This isn't the first time biotech - a two-decade industry still waiting for maturity -- has been on a roll. The sector enjoyed a boom in the early '90s, then tumbled. Many investors rushed back in the middle of the decade, but the sector never quite lived up to its promise of creating a new health paradigm.
 Nevertheless, industry trackers say that whatever happens in the near term, they are still bullish on the biotech sector, citing huge scientific strides and improved fundamentals for the maturing industry. Last year, a record 22 biotech drugs and vaccines were approved by the U.S. Food and Drug Administration, bringing the total number of biotech products on the market to 92. About 350 products are in late-stage clinical trials.
Experts also note that as the population ages there will be an even greater need for innovative new drugs for cancer, Alzheimer's disease, heart disease and other conditions.
For many investors, the promise of biotech has an enormous "gee whiz factor," said Mike King, biotechnology analyst at Banc Boston Robertson Stephens. "It's an open-ended opportunity. We all have a personal interest."
Analysts said that after several months of seemingly indiscriminate buying across the sector by investors, the recent slide shows that people need to differentiate among companies, choosing firms that have strong business models and good management.
Gray, of the Kaufmann Fund, said that investors who want to keep their hand in the volatile genomics sector can moderate their risk by investing in "pick and shovel" companies that are supplying the tools and the technology for this new industry, such as PE Biosystems Group (PEB: Research, Estimates), Waters Corp. (WAT: Research, Estimates) and Qiagen (QGENF: Research, Estimates).
Investors should also study how much cash companies are sitting on. Amid this recent biotech bull run, companies such as Celera and Human Genome Sciences have amassed cash reserves, promising to make them the Leaders in the next round, said Peter Ginsberg, biotech analyst at US Bancorp Piper Jaffray.
The sector's recent "momentum got a little out of hand," said Eric Schmidt, an equity analyst at SG Cowen Securities, but added that "you want to be invested in this area." 
|
|
|
|
|
 |
|
