I think it was on this thread that the comparison between the Internet bubble and the 1991 biotech bubble was discussed.
cbs.marketwatch.com
In the end, there's no drug as powerful as Internet mania
By Darren Chervitz, CBS MarketWatch
Last Update: 8:21 PM ET Jan 15, 1999
NewsWatch
SAN FRANCISCO (CBS.MW) -- It was late in Day Two of
Hambrecht & Quist's week-long biotechnology conference, and they
poured into the conference room to hear the presentation, acting almost
like giddy girls rushing the stage at a Backstreet Boys concert.
Those lucky enough to get inside all huddled
together, Armani suit pressed against Armani suit,
in distances better suited to a rush-hour subway
than a business meeting.
Room to sit? Heck, there was barely room to
breathe.
So just what justified this sort of reaction from a
couple of hundred hard-nosed, biotech-focused analysts, portfolio
managers, venture capitalists, executives, and reporters. A new form of
heart surgery? A cure for the common cold?
Try a Web site.
That's right. The company was none other than drugstore.com, the new
e-tailing venture backed by Kleiner Perkins Caufield & Byers, the same
VC firm that brought Amazon.com (AMZN) to Wall Street.
"I haven't seen this kind of excitement at this conference in several years,"
declared Samuel Colella, managing director at Palo Alto-based
Institutional Venture Partners.
Some people thought the suit-clad
throng was clueless to get excited
about drugstore.com. "They don't
have diddly squat. They have an
idea," said Toni Gray, executive vice
president of Los Angeles-based
Biokeys Pharmaceuticals.
"Meanwhile, we already have a
company with $85 million in sales."
A little misty-eyed nostalgia
Yet if any industry should know how
an idea alone can sometimes be
enough, it's biotech. After all, these
people haven't seen anything like the
buzz being generated by the Internet since, well, the glory days of the
early 1990s biotech boom.
Colella said he believed many people attended the drugstore.com
presentation out of curiosity. But perhaps nostalgia also played a part.
OK, sure. Even at its height, the biotech craze
never got as bubble-licious as Net mania has
become. (If stocks could scoff, theglobe.com
(TGLO) would surely do just that upon hearing of
Genentech's (GNE) 104 percent first-day gain
back in 1980.)
"We had a little mania" in biotech, said David
Leathers, a venture capitalist with London-based
Abingworth Management. "[The Internet] is a
major mania. It's the mania of a lifetime."
But in some ways, Wall Street's latest infatuation
with The Web-sters does mirror what happened in the biotech sector.
Soaring stock prices based on promise, not profit. A genuine feeling that
these small companies could change the world. Lots of hot IPOs. An
endless supply of capital to go around for anybody with, yes, just an idea.
The fear, of course, is that the Internet craze will end in much the same
way the biotech bubble burst -- with some major success stories, but
mostly with a lot of broken dreams and empty wallets.
Blind optimism
"Anytime there's something that's new and outside the norm ... the mind
begins to work on all the possible outcomes, often leading to an optimism
that's blind to the level of risk," said Harlan Sonderling, portfolio manager
of Evergreen Investment Management.
But is it fair to compare the Internet to biotech? Biotechnology as a
science has fulfilled a lot of its promises, but many of the individual
companies soon realized that their ideas were flawed, and thus their
business models doomed. Biotech stocks were the ultimate concept story.
Internet companies, on the other hand, "have a much more concrete
business model," said Wallace W. Wadman, partner at Boston,
Mass.-based Constitution Research & Management.
Investors can at least compare the plans for most
Internet companies to those of existing and
profitable non-digital counterparts (Amazon.com to
Barnes & Noble (BKS), CNET (CNET) to
Ziff-Davis (ZD)). And even the more speculative
Internet companies (At Home (ATHM),
Broadcast.com (BCST)) are generating healthy and
fast-growing streams of revenue, something that
couldn't be said for many small biotech stocks.
The U.S. government, as well, was a clear negative
for the biotech industry, with a skeptical Food &
Drug Administration keeping new drug approvals at
a minimum for many years. (Only recently has the
agency seen the light, approving a record 16
biotech-generated drugs last year).
By contrast, the government has pursued a
surprisingly helpful hands-off policy towards the
Internet. Aside from restrictions on exporting
encryption-based security software, the
government has so far let the industry handle its own problems, such as
the domain name and privacy dilemmas. A moratorium on new Net taxes
has been the biggest boost, allowing e-commerce to blossom.
Changing technologies
The industries have their similarities, however. Fortunes for several
biotech companies waned because of new developments that made their
research obsolete. Just look at Vivus (VVUS), the maker of the Muse
impotency product. The development of Pfizer's (PFE) Viagra pill sent
shares of Vivus skidding into the low single-digits, down from a high of
40-plus in 1997.
Plus, "technology often proved to be more difficult to commercialize than
it first appeared to be," pointed out Medical Technology Stock Letter
editor Jim McCamant.
Changing or unproven technologies should also be a big concern for
Internet investors. Take the market for cable-based Internet access. At
Home's (ATHM) subscriber growth has fallen well short of the company's
initial pre-IPO forecasts.
And if companies like At Home do end up being wildly successful, how
will they alter the industry? Will "dial-up" ISPs still have a market? Will
Yahoo (YHOO) have to partner with TCI? And will cable operators
appreciate companies like Broadcast.com (BCST) distributing streaming
video of TV-like quality?
Patience is a virtue
In the end, however, impatience was the biggest needle in the bursting of
the biotech bubble. Investors got sick of promises and demanded
immediate results, which just wasn't possible for many of the drug
developers.
"I made a lot of money in biotechs, but I did sometimes have difficulty
understanding how the model was going to work," Colella said. "What
ended the parade was that very few of these companies produced on the
bottom line."
A similar impatience could crush Internet companies, many of whom are
spending aggressively to build a brand and market share at the expense of
the bottom line (E-Trade (EGRP) and Amazon, for instance, have seen
their stocks blossom after announcing that profits would be delayed).
If investors all of a sudden decided Internet stocks weren't worth multiples
to sales in the hundreds, a lot of Web players would have to change their
strategies drastically.
"I'm not saying the development of the Internet is going to take as long as
drug development, but I think it's going to take a lot longer to build up the
profits that these valuations are justifying," Leathers said.
Post-bubble aftershocks
Investors should also note what's happened to the biotech sector
post-bubble. The industry is dominated by giant companies, such as
Genentech and Amgen (AMGN), while the vast majority of companies
toil along in microcap land. In 1998, the 10 largest biotech stocks, which
make up more than half of the market cap in the industry, returned 70
percent, while those not in the top 200 lost 47 percent for the year.
Many analysts feel the same thing could happen with the Internet. The
Internet is destined to be huge, perhaps the most important technological
development in history, but there will be plenty of losers.
"They don't all win. They don't all make it," said Evergreen's Sonderling.
"For every success, there's bound to be multiple failures."
And despite the widely-held belief in first-mover advantages, the early
entrants may not be the eventual winners.
By utilizing their substantial market power and financial resources,
traditional pharmaceuticals like Merck and Pfizer have stolen a lot of the
thunder from the biotechs, Biokeys' Gray noted. The Internet sector could
experience the same phenomenon when companies like Wal-Mart or
Tower Records decide to get serious about the Web.
If a shakeout were to occur, the red-hot Internet IPO market would
surely take a hit. In biotech, the number of initial offerings fell to 12 in
1998 from 22 in 1997, with proceeds falling to $417 million from $750
million.
"When the [biotech] collapse came, they had trouble raising capital even
for legitimate, well-focused ventures," said Albert Greene, president of
Healthcentral.com.
Back to the drugstore
Of course, drugstore.com shouldn't have any problem going public.
Although the company hasn't yet opened its store, many observers have
already anointed it as the sequel to Amazon.com.
Conference attendees hoping to get the inside scoop on drugstore.com
were likely disappointed as Chief Executive Peter Neupert certainly came
through on his pre-presentation promise to disclose little of the company's
strategy "for competitive reasons." (Rival PlanetRx also gave a
presentation at the conference).
Not that Uri Reiner, a biotech analyst with Chicago-based Kilkenny
Capital Management, would have been able to hear if Neupert had said
anything anyway. Reiner, one of the people that had to stand outside the
conference room because of the crowd, said he doesn't know what to
think of all this Net madness or how it relates to the biotech bubble of the
past.
"I don't know much about the Internet, except that I wish I owned some
stocks," he said.
Some folks never learn. |
