A Hunt for the Gems in
Genomics
By SANA SIWOLOP
AMILO
MARTINEZ
remembers the joke
circulating around
Wall Street not that
long ago: If you want
to cause a buying
stampede among
investors, just insert
the prefix "gen" into a
company's name.
Dr. Martinez, an
internist who is a co-
manager of the
Dresdner RCM
Biotechnology fund,
witnessed the market
frenzy that began in
the fall of 1999, as
some genomics
stocks started to
more than quadruple
in value. Investors
saw a bright future in
genomics, believing
that the science,
which identifies the
genetic roots of
illnesses, would lead
to the development
of lucrative
life-prolonging drugs.
Analysts, though, had
warned that the industry was still in its infancy
and that most genomics companies could
expect to see losses for the next three to
five years. By last spring, as the overall
market began to tumble, investors began
pulling out of many genomics stocks almost
as quickly as they had plunged in.
The sector generally remains depressed
these days, even though researchers
announced in June that they had decoded
the human genome — a landmark scientific
discovery. (Celera Genomics, a unit of the
PE Corporation, and the publicly financed
Human Genome Project said they had
produced a rough draft of the body's
estimated 100,000 genes.)
Many genomics stocks are still off
considerably from their 52-week highs.
Celera, for example, hit $276 a share last
March, but now trades at $67.25.
Still, several genomics companies are busy
going public, with roughly a half-dozen more
initial public offerings expected through this
fall. Charles C. Duncan, a biotechnology
analyst at Prudential Securities, said that
about three dozen genomics companies had
already gone public this year, a rate he
called "amazing."
But for investors, picking apart the genomics
industry can seem as complicated as picking
apart the genes themselves.
"A fundamental problem is that people do not
understand exactly what these companies
do, or what their business models are for the
long term," Dr. Martinez said.
Meirav Chovav, an analyst at Salomon Smith
Barney, agreed: "What we're hearing from
both institutional and individual investors is
that everything is confusing in terms of what
fits in where."
Mr. Duncan said the genomics industry was
starting to sort itself into four broad camps.
The first group is the technology providers
that supply tools like the so-called gene
chips used in analyzing genomics data, along
with DNA sequencers and bioinformatics
software. It includes companies like
Affymetrix, LION Bioscience, Gene Logic
and Applied Biosystems, Celera's sister
company, which was formerly known as PE
Biosystems.
The second is information providers, like
Celera and Incyte Genomics, that compile
genetic information into databases and then
sell subscription rights to drug companies.
In the third group are the research
companies like Sangamo Biosciences,
Lexicon and Genome Therapeutics; they
generally operate under research
agreements to provide some sort of
valuable technology to biotechnology or
pharmaceutical companies. The fourth set
uses genomics to develop better diagnostics
and pharmaceutical products. It includes
companies like Myriad Genetics, Human
Genome Sciences and Millennium
Pharmaceuticals.
SOME money managers say genomics
investors have been cherry-picking
throughout the sector lately.
Steven Newby, portfolio manager for
GenomicsFund.com, a mutual fund that
started in March, said he thought that
investors had lost their earlier zeal for
companies that sell products like gene chips,
bioinformatics software and genomic
databases and are moving instead to those
that are actually developing drugs. He
pointed out that Affymetrix, Celera and Gene
Logic were off between 65 and 70 percent
from their 52-week highs, while the stock of
Millennium recently reached a new high, and
Human Genome Sciences was not too far
from the high it set last spring.
"There's been quite a restructuring of
investor interest from the spring, when
investors simply bought genomics stocks
lock, stock and barrel," Mr. Newby said.
Because genomics stocks have proved so
volatile, he recommended that investors
invest in a variety of companies across the
entire sector. The largest genomics holdings
in his fund are Millennium Pharmaceuticals,
Human Genome Sciences and Medarex, a
drug developer.
Dr. Martinez's fund also invests in Millennium
Pharmaceuticals and Human Genome
Sciences, though he also has positions in
eight companies that are mostly suppliers to
the genomics industry, like Charles River
Laboratories, a large provider of laboratory
animals used in research.
"Not only do we think that big suppliers are a
relatively low risk to play the genomics
industry, but many of these companies have
been profitable for many years and have lots
of cash on hand," Dr. Martinez said.
Mr. Duncan said he liked a diverse group of
genomics companies, although he is more
focused on those that are aimed at drug
development. Among his favorites are
Celera, Genome Therapeutics, Sangamo
Biosciences and Human Genome Sciences.
He also likes Curagen and Tularik, which are
involved mainly in drug discovery and
development, and Genomica, which provides
bioinformatics software.
WHILE some analysts say the stock of
Human Genome Sciences is overvalued —
they are generally cautious about the clinical
benefits of the drugs that the company
currently has in testing — Mr. Duncan has a
12-month target of $125 on the stock, which
closed on Friday at $88.13. The company
had a two-for-one stock split on Oct. 5.
Mr. Duncan's top pick is Myriad Genetics. He
sees it as unusually prolific in discovering
disease-related genes but also as an early
leader in the field of proteomics, which many
scientists generally regard as the next step
after genomics research. Proteomics
involves the large-scale study of the proteins
that are made by genes.
Proteomics companies have not eluded the
radar screens of investors lately. When
Ciphergen Biosystems and Genomica each
went public on Sept. 29, the stock of
Ciphergen, a proteomics company that had
just $5 million in revenue in 1999, doubled
from $16 to $32, while Genomica, the
bioinformatics company, rose just 44 cents.
Ciphergen Biosystems now trades at $29.75,
while Genomica is at $13.
Mr. Newby said he thought that investors
were latching onto proteomics as the latest
buzzword in the genomics industry.
"I first noticed the interest in the spring, when
genomics stocks were down, and investors
were looking for something new," he said.
Buzzwords worry Dr. Martinez, who said
genomics investors have already spent the
last year jumping from one trend to another.
Rather than focusing on trends, he said,
investors should remember that the
relationship between genes and diseases is
so complex that the efforts to date have
simply been "a race to the starting line."
Mr. Newby agreed — and recommended
some caution.
"This is an industry with open-ended potential
over the next 20 to 50 years," he said.
"There's no reason why you have to be right
there right now with all your money."
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