HGSI vs. CRA:
washingtonpost.com
Biotech Stocks Tougher to Unravel Than Genome
By Jerry Knight
Monday, February 19, 2001; Page E01
In the hierarchy of high technology, genetic research is the Washington region's most exalted industry.
Genomics has the potential to change human life more than any -- perhaps all -- of the other technologies that have transformed Washington from a government town into a high-tech hotbed.
Telecommunications, software, information services and even the Internet are mature technologies compared with genomics, where the evolution from promising concept to profitable corporation is only beginning.
As the genomics industry emerges, two Rockville companies are at the top of almost every list of leaders -- Human Genome Sciences Inc. and Celera Genomics Group.
Last week, when the official first draft of human DNA was published, Celera President J. Craig Venter and HGS Chairman William Hazeltine were again the media darlings du jour.
In between exchanging snarls, the rival PhDs played roles most corporate executives can only dream of -- not merely captains of industry but also captains of the starships exploring the frontiers of genetic medicine.
The message for investors was clear: If you want to put your money into genomics, Celera and HGS are the stocks to buy.
Well, if that's the case, why have both been such lousy investments?
Celera stock, which closed Friday at $42.56, is down more than 71 percent over the past year and is 85 percent below its peak of $276 a share. Celera is actually a division of a Applera Corp., a New England life-sciences company that issued a tracking stock for Celera in 1999.
HGS, $42.44 at Friday's close, is down 55 percent from a year ago and is 62 percent below its $116.38 peak.
Last week, both stocks repeated another trick for which they are infamous. After weekend reports that researchers were about to publish data showing humans have far fewer genes than scientists had thought, the stocks spiked on Monday and then began to dive. By Friday, Celera had lost more than $5, and HGS was down more than $11.
That's the first lesson for Washington investors who are thinking of putting money into the genomics giants: Never, ever buy these stocks after you've seen Venter or Hazeltine on TV or read a story about some breakthrough in gene research.
It's hard to think of any other local stocks that are so often hoisted by media hype and so predictably prone to giving back their gains immediately.
The problem with genomics stocks, says analyst Robert Swift of C.E. Unterberg Towbin, is that "the press has made it a hotter area than the savvier investors believe it to be."
Gene researchers have just now found out what's in human DNA. Next they have to find out what they can do with that knowledge, how they can create new drugs or genetic therapies and -- most important -- how they can make money.
"The distance in time from genes to drugs is not short," cautioned Swift, who was a drug researcher in the pharmaceutical industry before he became a biotech analyst.
Too many investors buy into the genomics hype without understanding either the science or the business plan of companies they invest in, he added. And even when the science and plan are solid, it's difficult to value genomics stocks because it will be so long before they make money.
Because the genomics stocks are so volatile, biotech analyst Meirav Chovav of Credit Suisse First Boston says Celera and HGS are great examples of one of Wall Street's unwritten rules: Never buy a stock on an up day.
The stocks are particularly susceptible to buying stampedes once they start rising, she said: "I think this is the only area in which people like something more because it costs more."
Chovav likes both stocks just fine at their current price levels. Last week in an extensive report on investing opportunities in biotech, she rated both a "buy."
Chovav gave an even more positive "strong buy" rating to Montgomery County's other big biotech, MedImmune Inc. Like Celera and HGS, MedImmune has had a rocky ride the last couple of years. Biotech stocks are extremely volatile and genomics stocks even more so, she noted.
"Genomics right now is somewhat under pressure," Chovav said. "I don't think the problem is specific to either of the stocks" -- HGS or Celera.
"I don't think that in either case you have company-specific issues. Both have delivered on their promises. You don't have a situation of anybody missing expectations."
The one expectation that's not been met is what scientists would find when they unwound the double helix of human DNA.
As Venter stressed in interview after interview last week, the uncovered genetic code carried a surprising message: There aren't as many genes as scientists expected. And the genes alone do not determine human destiny, the researchers found; it's the proteins they produce in cells. The code was cracked, only to reveal that the message is an even more puzzling riddle.
Answering that riddle may stretch out the process of turning genetic research into drugs even further, but analysts don't think that is why the stocks of Celera and HGS dropped last week.
The trading that drives the prices of genomics stocks isn't based on such careful calculations, but more the predictable pattern of the stocks reacting to short-run hype and longer-run fads in investing.
"Both Celera and HGSI over the past 18 months have had periods of massive, one might argue speculative, out-performance of the market," said analyst Emily Hall of Morningstar Inc., the Chicago mutual fund and research firm.
The genomics stocks peaked roughly 50 weeks ago -- along with the rest of the techs -- and collapsed when the tech bubble broke.
Genetic research stocks have gone through boom and bust cycles before, Hall said. When the sector came back into favor in late 1999, "You saw people who follow the sector arguing that it was different this time, based on fundamentals." Companies such as Celera were making key discoveries and companies such as HGS were actually testing drugs based on gene research.
"There was a grain of truth in that," Hall said. "The sector does remain one in which you've got a lot of momentum investing, based on the prospects of the sector, rather than the realities."
The realities are hard to assess. Many biotech analysts are -- like Swift -- scientists who can evaluate the projects companies are pursuing and make an informed, independent assessment. Few biotech investors are that sophisticated. And many traders have made money on biotech by ignoring the science and looking only at the technical trading patterns in the stock.
And the science is just the first layer of the DNA of genomics investing. Like the proteins that underly human genes, the business strategies of genomics companies are what ultimately determines their future.
The differences in their business plans are what distinguish Celera and HGS, all three analysts agree.
HGS generates revenue by doing basic genetic research for customers, and it has moved on to the next step: using the results of its research to put four drugs into early trials. It's a relative old-timer in the field, founded in 1992.
Celera makes money by selling its genetic knowledge. It cracked the DNA code on its own, using innovative computer techniques to speed up the work done by government and academic researchers working with HGS. Celera now says it will move into drug development as well as research on the proteins that have been found to be so important.
Celera also argues that its version of the human genome is more accurate than the one developed by the rival researchers working with HGS.
That claim is what produced the sparks between Venter and Hazeltine, who needled each other relentlessly last week. HGS and Celera are not merely competitors but enemies. The animosity between Venter and Hazeltine is as nasty as a World Wrestling Federation smackdown, only real.
Understanding that, Washington investors should simply ignore everything either company or executive has to say about the other.
A case also can be made that Washington investors ought to simply ignore both stocks. Their science is so complex, their business strategies so unpredictable, their path to profitability so uncertain -- to say nothing of so long -- that it's next to impossible to calculate what each stock is worth or which is the better buy.
"I don't think there are useful ways today to value it," says Swift.
The stocks are 55 to 80 percent cheaper than they were only a few months ago, and Chovav is not projecting either to return to its peaks soon. The Credit Suisse First Boston price targets, a year from now, are $55 a share for Celera, $70 for HGS.
Morningstar analyst Hall said, "This is certainly a better time [to invest in Celera and HGS] than it was six or seven months ago."
"At this point, the stocks are only appropriate for extremely aggressive investors with a very long time horizon," she said. "If you do invest in one of these companies, you need to do everything you can to avoid the herd mentalities. You need to be prepared for volatility. You need to be prepared to wait."
Jerry Knight's e-mail address is knightj@washpost.com. |
