TALES OF THE TAPE:Golden Outlook For Biotech Tool Makers
by BETH M. MANTZ Of DOW JONES NEWSWIRES
NEW YORK -- There's still gold to be found.
After last year's biotech gold rush, shares of research tool makers have fallen akin to the bust that beset California boomtowns in the 1850's. Despite such tough times, some say the prospects have never looked more resplendent for these pick-and-shovel companies that enable future biotechnology drug discovery and development.
As pharmaceutical and biotechnology drug makers scurry to find the next cure or treatment, demand for these tools - especially mass spectrometry instruments to analyze proteins - has not abated, making these undervalued and attractively-priced stocks even more desirable.
"It is so hard to know who the winner will be in developing new drugs, but we have a pretty good idea of who the companies will be that will supply those organizations with the tools for more rational drug development," said Mark Oelschlager, co-manager of Live Oak Health Sciences Fund, which has about slightly less than half of its $17 million assets in this space.
As of Aug. 31, the fund had positions in Waters Corp. (WAT), Applera Corp.- Applied Biosystems Group (ABI), Affymetrix Inc. (AFFX), Bruker Daltonics Inc. (BDAL), Caliper Technologies Corp. (CALP), Luminex Corp. (LMNX), and Molecular Devices Corp. (MDCC).
Among the tool makers, observers say investors' best bet is in the mass spectrometry space. Those companies have the technology to gather information about proteins, where the knowledge base has multiplied exponentially since the mapping of the human genome last year.
Gene Mapping Propels Industry
In 2000, science set off on a revolution that would change the world of medicine when Applera Corp.-Applied Biosystems Group's (ABI) genetic sequencing instruments deciphered and mapped the 3 billion chemical letters of the human genome. This so-called blueprint of life has bred volumes of information as researchers seek to understand genetic differences, protein productions and functions - each requiring specific mining and analytical tools. The data gleaned can be used for the supreme goal of developing new disease-fighting drugs.
Genome mapping paves the way for better understanding about the causes of disease. Genes code for proteins, and the absence or presence of some proteins impact sickness. Mass spectrometry systems, respectively developed and marketed by Applied Biosystems, Waters Corp. (WAT), Bruker Daltonics Inc. (BDAL), and Thermo Electron Corp.(TMO), generate such data.
Until 1998, mass spectrometry instruments saw low single-digit growth. In the last two years, the sector has grown about 40% annually, said Thomas Weisel analyst Paul Knight.
"We think this year and next year looks pretty good for mass spec," said UBS Warburg analyst Vivek Khanna.
In a recent UBS Warburg survey of 422 scientists who actively use mass spectrometry systems and have experience with purchasing equipment, 78% of the respondents said they were still in a growth phase of purchasing new instruments to add to their current capacity, as opposed to replacing their current equipment.
The survey data also suggested that the four largest mass spectrometry product lines sold by Waters, Applied Biosystems, Thermo Electron, Bruker Daltonics, and others should see unit growth of about 18% in 2001 and 2002, above prior growth estimates of between 10%-12%.
While capital equipment budgets are expected to rise between 6% and 8% in the next two years, the survey results suggest that mass spectrometry is getting a disproportionate share of the overall budget at the expense of other life sciences equipment.
Khanna expects Waters will organically increase its revenue between 12% to 14% during the second half of the year, affected by some lost shipping days after the Sept. 11 terrorist attacks. Competitor Thermo Electron could benefit from sales of new products, offsetting moderation of other lines while things seem less certain for Applied Biosystems and its new and faster API 4000 machine because flow rate does not appear to be a major factor in purchasing decisions, according to the survey.
Stock Undervalued Relative To Potential
Last year's frenzy surrounding the genome map coincided with the surge in the overall market. Surpassing the Nasdaq Composite and the AMEX Biotechnology indices, these genomic companies appeared to be on a projectile with no end in sight. The downturn that occurred in the fourth quarter of 2000 changed everything for these tool makers.
According to the Ernst & Young Genomics Index, genomics companies have lost ground to the general biotech sector between January and June 2001, even though over the last two years, the sector outperformed the Nasdaq Composite and AMEX Biotechnology indices.
Take Applied Biosystems, considered one of the bellwethers of this group. During the first week in January, the shares of the Foster City, Calif. maker of genomics research tools traded in the low $90s but shed more than two-thirds of its value in March when it hit a 52-week low of $18.49. Shares are slowly working their way up, closing Thursday at $28.85.
Waters, the biggest player in the mass spectrometry market, hasn't fared much better. Since its 52-week high of $85.38 during the first week of January, the shares of the Milford, Mass. maker of mass spectrometry tools slid throughout the year, hitting a low of $22.33 in July and rebounding slightly to the mid-$30 range. The shares closed Thursday at $37.45.
Some biotechnology tool companies saw revenue drop because of product competition. Waters lowered its second-quarter sales growth and earnings forecasts in June, blaming large pharmaceutical company customers for delaying purchases as they wavered between several new products introduced by Waters and its rivals.
Others were harmed by declining demand from biotechnology customers, which were reluctant to make capital purchases in an uncertain economy, as in the case of Applied Biosystems and its fiscal fourth quarter results. Foreign currency exchange also ate into sales more than expenses, so many tool makers logged a net-negative on the bottom line as the dollar appreciated against the euro and the yen, said Oelschlager.
Despite these issues that plagued the past three quarters, biotech tool makers are the safest way to invest in this new kind of drug discovery because "the whole process is a matter of screening, analyzing and sketching," said Knight |
