Feb 17 2000 5:01PM ET More on Winners and Losers...
Will Investors Get Burned by Biotech Boom?
by John W. Schoen
Senior Producer, MSNBC
The red-hot biotech sector continues to sizzle as panic buying broke out in the past few sessions among investors eager to catch a ride on the stock market?s latest momentum wave.
The recent surge has been fueled by major scientific announcements in the mapping of the human gene -- and the promise of breakthrough cures for everything from heart disease to cancer. But even biotech bulls are warning that the party is getting out of hand.
"At some point there will be a correction," said Eric Schmidt, a biotech analyst at S.G. Cowen & Co. "Things will not increase 10 percent each day like they are these days."
The Nasdaq Biotech index, up over 100 percent last year, has soared another 60 percent so far this year. Human Genome Sciences Inc. {HGSI} added fuel to the fire Wednesday with news that it had patented the so-called CCR5 receptor gene, a key piece of the puzzle governing how the AIDS virus enters immune system cells.
Other recent announcements point to the likelihood that this year will likely see the long-awaited completion of a detailed map of the 3 billion chemical pairs that make up the genetic blueprint for mankind.
"There?s only one human genome," says Mike Sheffery, biotech analyst at OrbiMed Advisors. "There?s a sense that when all these gene targets are out there will be a transformation of medicine and there is tremendous upside."
Biotechnology Index 52-week stock performance
The biotechnology industry weathered a similar heady boom in 1991, when investor fervor over the promise of breakthrough science sent share prices soaring.
That rally ended with a painful thud. After rising some 150 percent in 1991, the sector lost 40 percent of its value in the first five months of 1992. But this time, say those who lived through that painful period, there are some important differences.
"The pipeline is chock full of drugs," said Kurt von Emster, portfolio manager at the Franklin Biotech Discovery Funds. "So even if you have some companies fall out and blow up on you, there are so many with drugs in clinical trials, the majority are going to get to market."
Is Biotech Poised for Another Boom?
The industry has clearly grown up since the 1992 bust. Major players like Amgen {AMGN}, Biogen {BGEN} and Genzyme {GENZ} are generating profits with proven drugs and are moving many more through the pipeline.
Analysts say weaker companies have folded or been acquired. Many emerging companies are better financed. And they?re striking better deals with major pharmaceutical companies, capturing more profits when they bring their products to market.
But this year?s gold rush has stunned even the most loyal biotech bulls. Many say investors have begun applying "Internet valuations" -? stock prices based on earnings many years in the future.
"My biggest concern is that people are getting into names that are not quality names," said von Emster. "The rising tide is raising the marginal companies and the downright bad companies."
Even large, profitable biotech names are trading at huge premiums thanks to a flood of cash that has rushed into the sector.
"A lot of money has gone into the biotech funds, so it?s sort of a self-fulfilling prophecy," said Elise Wang, a biotech analysts at Paine Webber. "The more money portfolio managers have, the more they are going to put into the names they like."
There?s also a flood of money flowing directly to emerging biotech players, with some three dozen lined up in the initial public offering pipeline. That means another round of moon-shot first-day pops will likely generate even more demand form investors. But it?s just one more sign of an overheated market.
"I expect a ton of paper to hit this window," said Sheffery. "And it will choke itself off, just like the Internet did last year ? with poorer and poorer offerings coming to market."
Analysts and portfolio managers say there are several important factors investors should look for. Those include management with a solid track record, strong scientific talent, major pipeline products, key patents, and a strong outlook for profits.
Wang says she looks for smaller companies that have sold "news flow" including clinical data for later stage trials, product approvals and announcement of deals with bigger pharmaceutical companies. She cited three smaller cap names on her recommended list.
Texas Biotechnology Corporation {TXB} is waiting for FDA approval to begin US marketing of NOVASTAN, an anticoagulant with potential uses in cardiac and other treatments. The drug is already sold in Japan. The company is also developing treatments for cancer, asthma, psoriasis, and rheumatoid arthritis.
Visible Genetics {VGIN} is waiting for FDA approval for test kits for HIV and cancer that help doctors can choose treatments for those diseases. The company also makes DNA analysis software and a DNA sequencer.
Cygnus, Inc. {CYGN}, which makes drug-delivery and diagnostic systems, is waiting for FDA approval is for A wrist-worn device called GlucoWatch that monitors blood-sugar levels for diabetics without breaking the skin. The company has already lined up Yamanouchi Pharmaceuticals to sell the product in Japan and South Korea.
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