Web Stocks Are Booted For New Flame: Biotechs
The Wall Street Journal Interactive Edition -- February 23, 2000
By AARON ELSTEIN / THE WALL STREET JOURNAL INTERACTIVE EDITION
Internet stocks are fast losing their status as the main squeeze on Wall Street. In recent months, investors have been kicking their longtime darlings to the curb to court a new flame: biotechnology stocks.
The biotech sector is emerging as the new craze on Wall Street because of important advances the industry has made in developing once-elusive treatment and cures for illnesses, such as cancer, using gene therapy.
While many biotech companies are still young and green, investors see the potential for staggering profits in those that help mankind solve life's worrisome illnesses and are trying to zero in on them early.
It's not insignificant either that Internet stocks, which have enjoyed sizzling gains last year and earlier, are beginning to move in fits and starts. Many hot "dot.com" stocks are down from their summer highs, too.
But biotech stocks are roaring. While the Dow Jones Internet Index has risen just 1.5% this year, the Nasdaq Biotechnology Index has surged 67%. Individual stocks are doing even better.
Take Celera Genomics. Shares of the Norwalk, Conn., gene research company have gained 124% this year, from 74 1/2 to 167. Since Dec. 1, the stock has risen a stunning 446%.
Diversa, San Diego, another gene research company, has seen its shares rise to a high of 120 on Feb. 20, a gain of 400% from its initial offering price of 24 four days earlier. And the company isn't even profitable.
This isn't the first time that investors have salivated over biotech stocks. In the late 80s early 90s, the sector soared to exuberant levels as investors bet back then that these companies were going to be as hot as fire.
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But cold water quickly doused them and the biotech craze became another Dutch tulipmania. But industry analysts say things are much different from those virgin days.
David Saks, chief portfolio manager for health-care stocks at Gruntal & Co., says biotech companies have matured and are generating the products and profits that investors have long envisioned.
"It's been a long wait," Mr. Saks says, "longer than many people expected. But the industry is finally living up to its hype and expectations."
Biotech companies have been steadily pushing more drugs and treatments out the door.
The U.S. Food and Drug Administration approved 22 new biotech treatments last year -- the most ever in one year, according to the Biotechnology Industry Organization, a Washington trade group. That compares to seven in 1994, when the biotech balloon popped.
Currently, 92 biotech drugs and vaccines are on the market, according to the biotechnology group, and 350 drugs were in "late-stage treatments" at the end of 1999.
Biotech stocks, show all the signs of becoming favorites of day traders and other investors looking for hot stocks.
On Silicon Investor (www.siliconinvestor.com), message boards about small biotech companies have taken over from the dot.coms and are routinely the most active topics. Silicon Investor has boards dedicated to some 220 different biotech companies.
"It's all about finding the new hot sector, and for now, that's biotechs," says Mel Spivak, an attorney in Poughkeepsie, N.Y., who often posts messages on a Silicon Investor board titled, "2000 -- Year of the Biotechs!"
The biotech wave seems like a flashback to the Net frenzy: skyrocketing stocks, incessant chatter on message boards, and a pipeline jammed with initial public offerings, many that seem to defy stock market gravity.
Investors, like sharks on a feeding frenzy, can't seem to get enough. Small biotech stocks regularly rank as the most heavily-traded issues on the Nasdaq Stock Market.
The biotech stock boom started last fall, analysts say, after an international group of scientists called the Human Genome Project said it had mapped out all the genes in a single human chromosome.
The hottest stocks have been the so-called genomic companies, which identify genes and proteins that are believed to be at the root of some diseases. Investors are betting that genomic companies, most of which are quite small, will discover drugs faster than traditional drug companies.
"Potentially, they represent a paradigm shift in how we treat disease and discover treatments," says Albert Rauch, a biotech analyst at First Union Securities.
But he adds that most gene-based medicines are many years away from being ready for market, and it's unlikely that many now in development will ever be successful.
Nevertheless, analysts say, biotech stocks have the same appeal for momentum-minded investors as Internet issues.
"In both cases, you're making a bet that an little-known company today bears little resemblance to how it will look years from now," says Robert Toth, a biotech analyst at Prudential Vector Healthcare Group. "At the same time, most companies in the Net and biotech will not make it. And while everyone's pouring money in and trying to sort it out, stock prices have gotten pretty out of line in some cases."
Despite the difficulties in successfully developing and marketing a biotech treatment, Mr. Rauch adds that a company may need to develop only one drug to make it big with investors.
Amgen, the bellwether of biotechs, markets three drugs, which treat hepatitis, kidney disease, and produce red blood cells. These three treatments helped Amgen generate revenues of over $3 billion last year and investors have assigned the company a market value of over $70 billion.
That kind of success has message-board participants furiously speculating on which company could be the next to strike biotech gold.
Mr. Spivak, the Poughkeepsie lawyer, says he's made a big profit investing in Medarex, a Princeton, N.J., company that is developing cancer treatments. Its stock price has leapt from about 11 in early December to as high as 115 3/8 earlier this week, after the company said its cancer treatment is entering the later stages of testing. That means federal regulators have not approved the drug's sale, nor has its effectiveness been fully demonstrated.
But Mr. Toth of Prudential adds that many new investors do not seem to care about the possibility that some drugs may meet with disappointing test results.
Considering that news from biotech firms comes out daily and is often hard for people without medical backgrounds to understand, several former industry executives have gained broad followings on Silicon Investor for posting their insights about companies and their treatments.
One is Richard Harmon, a former executive at PharMingen, a San Diego biotech firm (which has since sold to Becton Dickinson). Now a full-time investor in Lafayette, Calif., Mr. Harmon says he buys and sells biotech stocks the same day to take advantage of the speculative frenzy. "You can be in cash at the beginning and the end of the day and still play biotechs," he says. "So that's what I'm doing. It helps me sleep better at night."
Write to Aaron Elstein at aaron.elstein@wsj.com
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