HEARD ON THE STREET
wsj.com 7/15/2002
Bargain Hunters Take Look At Depressed Biotech Shares
By AARON ELSTEIN
THE WALL STREET JOURNAL ONLINE
Biotechnology stocks, for years the ultimate in boom-and-bust investing, have lately been mostly a bust. But investors who once avoided them like a plague are now poking around for value.
These stocks once fetched hundreds of dollars a share on little more than the promise of a potential new medical treatment. But with a bear market and concerns about the pace of the development and approval of new drugs, among other worries, the American Stock Exchange Biotech Index fell 30% in the second quarter and is down 62% from its March 2000 high, and individual stocks have fallen even more.
Take Diversa Corp., an unprofitable San Diego developer of enzymes for medical and agricultural purposes. The shares hit $169 shortly after the company went public in 2000, but now go for $7.41, a 96% plunge. That's about the right price to attract investors such as Preston Athey, who manages T. Rowe Price Small Cap Value Fund. He has been adding Diversa to his portfolio in hopes of getting the same two- and threefold gains he got from biotechs after they slumped in 1995 and 1998.
"When these stocks fall into the bottom 10% of their range, I buy them," he says. "Actually, I rent these stocks. These aren't the kind you want to hold forever." Biotech stocks account for less than 1% of the stocks in Mr. Athey's fund, according to regulatory filings.
Jay Markowitz, a biotech analyst at T. Rowe Price in Baltimore, compares bargain-hunters' interest in biotechs these days to Warren Buffett's Berkshire Hathaway Inc. agreeing last week to participate in a $500 million investment in Level 3 Communications Inc. Mr. Buffett had shunned telecommunications and tech stocks for years. "Biotech valuations are in such a state that people who ordinarily wouldn't look at [the sector] are looking at it," he says.
David Brady, a money manager at Stein, Roe & Farnham Inc. in Chicago, traditionally hasn't kept many biotech stocks in his portfolio. But he has been adding Genentech Corp., a South San Francisco, Calif., drug company. He now has $11 million of Genentech stock in his portfolio, a 1.4% chunk. "The biotech stocks are extraordinarily cheap now," he says. "Maybe the pipeline of new drugs is better there than for the big pharmaceutical companies. So I think it's worth having some exposure there."
Another stock Mr. Athey finds "attractive" is NPS Pharmaceuticals Inc. of Salt Lake City, which is developing drugs for gastrointestinal and central-nervous-system disorders although none have gotten beyond the clinical-trial stage. Mr. Athey says he first bought the stock in 1998 at $6 a share and sold most of it when the shares rose as high as $52.50 in 2000, and, after a dip, he sold again when it climbed as high as $41.14 in December. But the stock has since been hit hard amid news of manufacturing problems, and now fetches about $17. The company had a first-quarter net loss of $22 million, or 73 cents a share, on revenue of $787,000.
The biotech sector has certainly seen its share of setbacks. ImClone Systems Inc. has fallen about 90% since the U.S. Food and Drug Administration said late last year that it would refuse to approve the New York company's proposed cancer treatment and its former chief executive was charged with insider trading.
Meanwhile, investors say the FDA seems to be taking a more cautious approach toward approving many new drugs, though the FDA says on its Web site (www.fda.gov) that the median time to approve nonpriority drugs has been holding "relatively steady." Some investors attribute the FDA's apparent caution to the agency lacking a commissioner since George W. Bush was inaugurated last year. But analysts at Prudential Securities told clients last week that even if a new commissioner is selected, it's unlikely the FDA would change course.
On the earnings front, biotech bellwether Biogen Inc. last month lowered forecasts based on weak sales of its multiple-sclerosis drug, blaming slower growth in the U.S. market and significant reductions in wholesaler-inventory levels. And Genzyme Corp. guided down 2002 sales of its dialysis drug, also citing inventory issues.
Given such sluggishness, some biotech specialists see little reason to step up buying. Brian Clifford, manager of SunAmerica Biotech/Health Fund, says his fund has 16% of assets in cash now, which he says is higher than normal and tied to difficulty in finding stocks at attractive prices, even after the sector's drop. "Outside of the dozen or so companies that make money and can be valued pretty much like any other, with biotech you're talking mostly about companies in the development stage and the math that goes into valuing them gets looser," he says.
Indeed, few investors agree on what "value" in biotech stocks means. Mr. Markowitz, the T. Rowe analyst, says one reason Diversa seems attractively priced is that the company has about $5 a share of cash and short-term investments. More conventional valuation tools, such as price-to-earnings ratios, don't apply to Diversa, which had a first-quarter net loss of $7 million, or 20 cents a share, on revenue of $7.2 million.
But you can't necessarily judge a biotech's health by its cash. Consider Celera Genomics, a publicly traded business of Applera Corp. The unit had $608 million of cash on its books as of March 31 and currently has a market capitalization of about $720 million, with shares at just over $10, down from $276 in 2000. While shares of the profitless Norwalk, Conn., company, which aims to make money by selling data on the human genome, might seem a bargain with all that cash, the company is expected to use about $120 million of it this year. "Despite the fact that CRA's share price is approaching cash, lack of foreseeable near-term catalysts and the early stage of CRA's therapeutic pipeline lead us to reiterate our hold rating," wrote Credit Suisse First Boston analysts in a recent report. |
