Sizing Up Investments In Biotechnology Stocks
By CHRISTOPHER OSTER
Staff Reporter of THE WALL STREET JOURNAL
Any day now, PE Corp.-Celera Genomics Group is expected to announce that it has finished mapping the human genome, a watershed event in bioscience that took
hundreds of supercomputers nearly two years to complete.
Trying to find a reasonable entry point for investing in the biotech sector, which is shooting skyward again after an early spring sell-off that halved the sector's market
capitalization, seems nearly as arduous a task. Just ask the investors who poured $2 billion into Janus Global Life Science Fund in February -- no doubt having
noticed the 100% return of the previous three months -- just before the sector tanked and the mutual fund fell by 30% in March. In similar fashion, investors threw
money at mutual funds such as Fidelity Select Biotechnology and Rydex Biotechnology, which plummeted 30% and 27%, respectively, in March.
But the recent rally shows that investors weren't scared off by the plunges, despite genuine reason to be nervous. "There's an incredible amount of optimism about
the human-genome project, and there's probably money to be made, but it's unclear when it's going to be made," says Emily Hall, an analyst who follows
biotechnology funds at researcher Morningstar Inc.
But if biotechnology does hold great promise, how should an investor get exposure, especially given the volatility? It depends on your stomach for roller-coaster
rides. If risk averse, says Faraz Naqvi, manager of Dresdner RCM Biotechnology Fund, "I wouldn't invest in a biotechnology fund." Whatever their tolerance,
individuals probably shouldn't put more than 5% of their investment portfolios into the sector, he adds.
If you do want to roll the dice, says William Dougherty of Kanon Bloch Carre, a retirement-plan consultant, "I'd stick with a pure biotechnology play," partly because
"it's a way of controlling what you're after." Buying a diversified fund for its biotech exposure, he says, means you only stay exposed for as long as the manager likes
the sector.
Morningstar's Ms. Hall suggests sticking with funds and managers with long-term records and experience in the sector. She says Fidelity Select Biotechnology, like
many of Fidelity's sector portfolios, tends to switch managers frequently, but is a good option because it has Fidelity's vast research resources behind it. Rydex
Biotechnology, she says, is also a good option because it is index-based and gives investors broad exposure to the sector. Among the broader health-care portfolios
that have exposure to biotech, Ms. Hall likes Scudder Health Care Fund.
Regardless of what strategy a mutual-fund investor follows, history shows that market timing is particularly difficult in biotech. In the early '90s, biotechnology stocks
were all the rage, and no mutual fund could match the returns of Fidelity Select Biotechnology, which jumped 44% in 1990 and 99% in 1991. The fund's asset base
swelled to more than $1.1 billion as investors were drawn to the sector's promise. During the next three years, with just a handful of biotech companies actually
generating profits, the fund dropped 26%.
Things are different this time around, biotech fund managers say.
"The last 20 years of biotechnology research have produced only 14 profitable companies," says Kurt Von Emster, manager of Franklin Biotech Discovery Fund, a
fund that returned 97.91% last year and is currently closed to new investors. "This year 20 will be profitable. Next year, the number will be 40." The biotechnology
industry's total market capitalization, he adds, has ballooned to $300 billion today from $85 billion two years ago. Interest in the sector has grown to the point that
Franklin is currently rolling out biotech funds in Europe and Canada and has an offering for Asian investors in the works.
Much of the renewed interest is being spurred by the genome project. But the project's day-to-day progress is somewhat irrelevant to the sector's short-term
prospects, since it's a given that the project will succeed and be a boon to research longer term. Still, biotech stocks have climbed and cratered based on news from
the project. The sector's March malaise was triggered when President Clinton and British Prime Minister Tony Blair released a statement that said human genes
should be "freely available to scientists everywhere." Biotech stocks tanked because it looked like the government would limit their ability to sell gene data and
develop products, fears since largely eliminated because of follow-up statements by President Clinton.
Fund managers say part of the rebound in biotech stocks -- the Amex Biotechnology Index is up 40% since April 14 -- also is simply due to the stocks looking cheap
after a six-week plunge of 50% in March and early April. Despite the recent rise, the index is still 27% off its high.
At the very least, the funds have broken out of a rut. In years past, the sector's rallies tended to coincide with spring medical conferences, and their attendant biotech
hype. Today, "the news isn't as clustered as in the past," says James Fenger, lead manager of the Scudder Health Care Fund. "Now you've got enough new
information flow and enough new companies moving into profitability stage to sustain interest in the sector."
Mr. Fenger, who has about 36% of his fund invested in biotechnology stocks, says he added to his biotech position after the March downdraft, including such
names as Alkermes Inc. and Celgene Corp.
The promise of future riches in biotech has attracted the type of "aggressive growth" fund managers who normally concentrate on fast-growing technology stocks.
Fidelity Growth Company, with its $32 billion in assets, recently listed biotech stars MedImmune Inc., Genentech Inc. and PE Corp.-PE Biosystems Group among
its top-10 holdings. "Biotechnology has become very Nasdaq-influenced," says Dresdner RCM's Dr. Naqvi. "If you see technology stocks running, the biotechs tend
to run, too."
When they don't, some biotech managers seek shelter in the growing subsector of biotech firms that turn a profit. Mr. Naqvi says that when things looked rocky for
biotech in March, he shifted some of his portfolio into what he calls "picks and shovels" companies, those that supply other biotech firms with implementation tools.
That includes PE Biosystems, which makes the computers that power genomics work, and Waters Corp., which makes purifying systems used by biotech firms.
Many other health-fund managers flee to the big pharmaceuticals stocks. In March, Antony Milford, the London-based manager of Munder Framlington Healthcare
Fund shifted money out of biotech and into Pfizer Inc. and Pharmacia Corp., now his fund's two largest holdings.
So many professional stock pickers may be following this pattern that biotech and pharmaceuticals stocks, which once tended to rise and fall together, have become
inversely correlated. Last Friday, when biotech stocks surged 8.3%, pharmaceuticals stocks fell 3.3%. In March, when biotechs plunged, pharmaceuticals rose 9.4%.
* * *
Money-Market Fund Assets Rise
Money-market mutual-fund assets rose by $14.23 billion to $1.693 trillion for the week ended Wednesday from a revised $1.679 trillion, the Investment Company
Institute said.
Assets of the 979 retail-class shares increased by $5.53 billion to $983.37 billion from a revised $977.84 billion, the trade group said. Among retail-class shares,
assets of the 631 taxable shares rose by $3.03 billion to $816.64 billion, while assets of the 348 tax-exempt shares increased by $2.5 billion to $166.74 billion.
Assets of the 809 institutional-class shares increased by $8.7 billion to $709.53 billion from a revised $700.83 billion. Among institutional-class shares, assets of the
631 taxable shares rose by $8.11 billion to $656.15 billion, while assets of the 178 tax-exempt shares rose by $585.1 million to $53.38 billion.
Write to Christopher Oster at chris.oster@wsj.com
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