Sure Liz-
Medical Specialist Funds Favorite Biotech Stocks
Research Analyst: Bob Hirschfeld (1/18/00)
Ken Kam, manager of the Medical Specialist Fund (NASDAQ:MSFQX - news) ,
says he tries not to pay attention to
market sentiment, preferring instead to remain focused on company
fundamentals and valuations.
?I focus on the company, not the market,? says Kam.
Now, here?s the part that could appeal to Internet investors. He says that a
number of the companies he finds intriguing fall
below Wall Street?s radar, since ?many don?t have sales yet.?
Don?t knock the strategy just yet. Over the past three months, the fund has
returned 33%, compared with an 11% return
for the S&P 500.
To establish a value for some of these companies, Kam says he ?depends on
evaluating clinical trial data, not applying financial screens.?
The fund is now focused on three primary trends ? genome, or genetic
research, cardiac care, and healthcare information services.
Kam believes that the human genome project will revolutionize the
pharmaceutical sector. ?Within three to five years, there will be an explosion of
knowledge
in the genetic treatment of disease,? he says.
Heart disease, Kam points out, has a genetic component. In the
not-too-distant future, the manager says, ?we will be able to test for a
predisposition to heart
disease, then administer a shot that will stimulate cells and grow new arteries,
thereby improving blood flow.?
Though the genome project is still evolving, Kam says the fund has a sizable
position in Celera Genomics (NYSE:CRA - news) , a company that is
?developing comparative genome maps by looking for differences among
individuals that will help establish the genes that predispose toward disease,?
he
says. Its stock closed Friday at $231.75, up $14.88. Less than a year ago, it
traded at $25.19. Not too bad considering it has very little in the way of
revenue
and large losses.
Another position the fund has in the sector is Affymetrix (NASDAQ:AFFX -
news) , a company that, while not decoding the genome, is instead developing
tests that will look for flaws in the genetic makeup. Its stock also has soared,
to $186.75, up $23.69 on Friday alone. Its spring low was $31. In the first six
months of the year, however, the company lost nearly $15 million on $39.5
million in revenue.
In recent months, Kam has also added a position in Incyte (NASDAQ:INCY -
news) , a company that develops and markets genomic databases, genomic
data management software which helps pharmaceutical and biotechnology
researchers with all phases of drug discovery and development.
Kam says he doesn?t believe these stocks are overvalued following their recent
run-up.
?Not if you compare these last eight weeks to, basically, 10 years of
underperformance,? he says. ?People don?t understand the potential here.
Decoding the
genome will have a huge upside for these stocks, much higher, than the
potential upside for wireless communications. Wouldn?t you trade in your
wireless
phone to forestall a heart attack?? he asks.
The fund also holds such biotech stalwarts as Amgen (NASDAQ:AMGN - news)
, MedImmune (NASDAQ:MEDI - news) , and Sepracor
(NASDAQ:SEPR - news) . All of these, Kam notes, will provide better research
for new drugs, much as the study of the genome will provide better targets
for those drugs. Kam says Sepracor ?is reaching the eighth year of a 10-year
development cycle, and they are going to own the antihistamine market.?
The fund is also focused on cardiac care. Kam notes that heart disease, in one
form or another accounts for 50% of the U.S. mortality rate. Markets for
defibrillators, pacemakers, stents, and balloon angioplasty are strong, and
unlikely to be ?obsoleted? by genomics discoveries for at least 8-10 years. In
this
segment, Kam says he likes Guidant (NYSE:GDT - news) and Boston Scientific
(NYSE:BSX - news) .
The manager says he is enthusiastic about Boston Scientific?s ?mir stent with
sox,? which is designed to ease balloon angioplasties by keeping the balloon
from
getting stuck to plaque. The device will likely enter the market this quarter.
Pending the advanced stent?s market entry, Kam sees Boston Scientific as an
?easy double.?
One new addition to Kam?s cardiac care holdings is Cambridge Heart
(NASDAQ:CAMH - news) , which provides a non-invasive way of testing for
severe
heart attacks. Cambridge?s device, already FDA-approved, faces
reimbursement issues. Should these be resolved, the manager believes shares
should
receive a new lease, and perhaps before, if the company is taken over by a
Guidant or a Medtronic (NYSE:MDT - news) to round out their cardiac lines.
The fund also focuses on health care information services. Kam says the
segment was hurt last year by Y2K worries that led hospitals to cancel orders,
which
flattened revenue.
Kam favors companies like Eclipsys (NASDAQ:ECLP - news) and Quadramed
(NASDAQ:QMDC - news) . Eclipsys, Kam notes, is trading at $8.50 per
share and should likely post per share earnings of $0.70 for 1999 and $1 for
2000. Apply a market multiple of 25 to year 2000 earnings, noted Kam, and
you ?get a triple.?
Morningstar, the Chicago-based mutual fund tracker, has termed Kam, the
?Evel Knieval of health-care investing.? As to whether he indeed takes risky
positions, Kam says, ?I don?t think investors with longer time horizons should
worry about us. We?ve got the right companies and they?ve got good
prospects. No matter what the market does over the short term, over a three-
or four-year horizon, investors don?t need to worry.?
Bottom Line:
The Medical Specialist Fund was previously a part of the Firsthand Fund family,
which Kam co-founded, but will soon be managed by his new company,
Ingenuity Capital. Despite the administrative change, Kam is still in Silicon
Valley and still handpicking fast growing biotech stocks.
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