A Hunt for the Gems in Genomics
nytimes.com
"CAMILO 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." |
