Some more reality and a real good article for all of us to read.
The Wall Street Journal Interactive Edition -- November 24, 1997
Biotech Stocks Are Hot Again,
But Newer Issues Are Risky
By E.S. BROWNING
Staff Reporter of THE WALL STREET JOURNAL
Biotechnology stocks are hot again. But investors trying to cash in on the sector's popularity are finding it is still easy to get burned.
The sector owes its recent good health to the fact that biotech companies finally are delivering real drugs to the market. Within the next five years, the bulls say, half of all new drugs approved by the Food and Drug Administration could come from the biotechs. And yet the total market value of all biotech companies still is just $100 billion, less than that of Merck alone. Companies that deliver new products as expected could see their stock prices balloon.
As a result, interest in the stocks has perked up. The Franklin Templeton mutual fund group of San Mateo, Calif., for example, launched a new biotechnology mutual fund in September in hopes of taking advantage of a coming investment wave. But judging by the performance of two of its first stock holdings, however, the risks remain high.
Rise and Fall
One early holding was genetic-analysis company Hyseq. After coming public at 14 in August, Hyseq soared to 20 1/2 in September -- and then collapsed. It closed Friday at 13 1/2 . Another holding is Zonagen, whose impotence drug is a biotech darling. It leapt 36% from mid-September to mid-October, gave it back, gained another 20% and then gave that back.
"These are definitely high-risk stories," says Kurt von Emster, who manages the Franklin fund. He says he held on to Hyseq only briefly, selling it after it quickly hit his price target. He still holds Zonagen. One way he tries to limit risk, he says, is to hold a group of 15 to 20 potential winners. Others that he currently likes include MedImmune, Texas Biotechnology, Gilead Sciences, Inhale Therapeutic Systems and Aviron.
The stocks certainly have shown signs of life this year. After bouncing up and down, the Amex Biotech Index gained 47% from Aug. 13 though Oct. 13. But it has slipped about 14% since. It was pushed down by a flight to safe stocks after the October market drop, and by a glut of new biotech stock offerings.
Michael Yellen, portfolio manager of the GT Global Healthcare Fund in San Francisco, says he has close to a quarter of his $650 million fund in biotechs, but he worries that "the broad bull case that this is the wave of the future and that these companies will all do well just isn't true."
Changing Situation
He says as many as 20 to 40 biotech companies could bring products to market and begin reporting real revenues and earnings within the next two years. "That truly is different because up until about a year ago there were only six or seven companies that were true operating companies," he says.
But that doesn't mean all the stocks will soar. When the companies are young and raising research money, he notes, investment banks or analysts sometimes generate overly ambitious profit estimates.
"The expectations are so often too aggressive," he says. Even when a company does bring its first product to market, often "that first product on the market isn't going to be enough to carry them as a company," he adds.
Sequus Pharmaceuticals, he says, now has two products on the market, an antifungal product and a chemotherapy drug. But sales haven't been as strong as some investors hoped. The company continues to post losses and its stock is trading around 8, after trading as high as 22 in June 1996.
Views on Idec
Idec Pharmaceuticals remains a favorite of Larry Feinberg of New York hedge fund Oracle Partners. He hopes to see FDA approval soon for an Idec antilymphoma drug. But as the FDA ponders its final decision, investors have shown how nervous they can be. The stock has slipped more than 13% to 39 7/8 from a high of 46 in early October.
Something similar has happened to another of Mr. Feinberg's favorites, Magainin Pharmaceuticals, which in addition to the standard industry issues has been pushed down by an issue of new stock.
James Harmon, who manages Fidelity Investments' Select Biotechnology Fund, notes that as the stocks become more dependent on actual results, they tend to perform less as a group and more as individual names. Kos Pharmaceuticals has lost more than 60% of its value on disappointing sales news, he notes, while Immunex Corp., a maker of anticancer drugs, has more than tripled this year, even though it has given back 23% since mid-October.
"We have stocks that are going through the roof and we also have stocks that are going down," he notes. "It is more data driven."
Mr. Feinberg and Mr. Yellen both say that they like to buy companies that they view as strong contenders but whose stock has, in their view, been temporarily depressed. One of Mr. Yellen's favorites is Guilford Pharmaceuticals, which has a time-release wafer for brain cancer but whose first-year sales, he says, now are expected to be lower than initially hoped. Its stock is down more than 26% since early October.
Tough Task
The problem is that many companies depend heavily on just one or two drugs. The trick is to distinguish between those that are temporarily down and those that are facing more-fundamental issues.
But that can be hard to do. Mr. Yellen cites Agouron Pharmaceuticals, whose anti-AIDS drug Viracept has posted strong initial sales. Trouble is, other companies are rapidly developing competing drugs. "It is hard to see what the sales will be in two years," Mr. Yellen asserts. "Those kinds of companies [with successful products] truly are very difficult to find -- and when you find them, they are very dependent on the product. If something happens to the product, the stock can go back down."
Because of that, says Franklin's Mr. von Emster, he often invests in companies early, when they still are trading on projections. "We prefer companies pre-earnings, because no financial expectations are built into the stock price," he says. Companies trading on actual earnings can be riskier to own because they are prone to disappointment, he explains.
Another problem that can damp biotech rallies is a tendency for the money-hungry companies to issue new stock whenever biotech stocks start showing signs of life. Mr. Yellen says that more than two dozen new stock prospectuses hit his desk after biotech stock prices enjoyed their latest run-up, between August and October. The glut of new stock helps explain the sector's recent sag.
"There are just too many road shows and it really floods the market," Mr. Yellen says. "That's what really scares me."
But for all the land mines waiting to explode, many health-care investors think that at least some biotech stocks could show sharp gains in the years to come. Some of the biotechs are bound to be acquired by bigger companies. Mr. Feinberg thinks biotech also could attract some of the investment money that is leaving technology hardware and software companies. Mr. von Emster says money could shift to biotechs from the big, standard drug companies, whose stocks have been cooling off.
"A lot of the money that went into the pharmaceutical group is looking for a new home," Mr. von Emster says, adding: "We think that over the next few years you will see a plethora of new mutual funds' specializing in biotech companies.
The few existing funds reflect the sector's bumpy ride so far. Fidelity's Select Biotechnology Fund hit $1.1 billion when biotech was hot back in 1991, then fell as low as $396 million in 1994. It bounced back to $847 million in 1995, and by the end of October had slipped to $616 million.
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