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Biotech / Medical : Biotech Valuation -- Ignore unavailable to you. Want to Upgrade?

To: Thomas M. who wrote (2168)	11/30/2000 10:15:18 AM
From: Thomas M.	Respond to of 52153

Michael Shaoul replies It wasn't my intention to compare biotech companies to dot.coms, as opposed to other high-tech companies in such sectors as chip manufacturing and, especially, broadband. But the subheading that Barron's used -- "Could biotech become the market's next dot.coms?"-could have conveyed that idea. Nevertheless, the article made it clear that I wasn't questioning the validity of the scientific progress made in this sector or denying that it might be of significant financial value. My point was that, in other tech sectors, enormous progress also had been made and coherent business plans followed and yet, in retrospect, the market mispriced the value of these technologies. At some time, biotech may prove once more to be an excellent sector to invest in. But smart investment decisions are about matching risk to reward, and I didn't find an acceptable balance between the two in the biotechnology sector, given the valuations at the beginning of November. I believed this sector was vulnerable to a sizable correction. In my opinion, we are in the middle of that process. Another of my points was that it was unlikely that biotech companies could trade at valuations significantly different from those of the rest of the tech market. The Nasdaq is now trading at approximately half its March level, and it's not just the dot.coms that have been decimated. Sectors such as broadband, chip manufacturing, Internet infrastructure and software have seen their multiples break down. Furthermore, each of these sectors is packed with investment pros who "closely analyze and calculate present values of their relevant technologies." In order for biotech to be immune from overvaluation and subsequent correction, three conditions would need to be satisfied: First, the sell-side analysts who follow biotech have to be substantially more accurate in generating sustainable valuation models than their colleagues in the other sectors. Second, specialized investors such as Oracle need to be substantially more able to model their technology than their peers in other sectors. Finally, the "momentum" investors who fueled the technology boom would have to have been absent from the biotech scene. It's unlikely that any of these conditions exist. As to the biotechs' technical strength, if Oracle wishes to follow the 200-day moving average, it should be aware that the Amex BTK index crossed this important indicator on November 17. As of Wednesday's close, the index was some 50 points below this level, a decisive breakthrough. Significantly, this didn't occur in last April's collapse. In fact, the BTK hadn't traded below its 200-day moving average at any other time during the 1999-2000 bull market. Furthermore, several substantial companies such as Biogen and Immunex have traded below this level for some weeks, while others including Cor Therapeutics, Medarex, Imclone, Millennium Pharmaceuticals and MedImmune passed through this level in the recent selloff. Of the three highflyers mentioned in the article, Protein Design Labs crossed its 200 m.a. by some 13 points but rebounded to close just above it; Vertex made a similar move, while IDEC Pharmaceuticals is, as I write, still some 40 points above its 200 m.a. Under Oracle's own guidelines, therefore, it seems clear that this sector is technically weak. Our firm, Oscar Gruss & Son, is no enemy of biotech (indeed we maintain a research department covering this sector), and we believe that some biotechs will mature into successful, profitable organizations. Nevertheless the group's valuations, when viewed against the broad tech market's breakdown, are a source of concern. Even in a legitimate gold rush, the careless and unlucky can lose their shirts.