BOSTON CAPITAL Lowering the boom
By Steven Syre and Charles Stein, Globe Staff, 02/25/99
If philosopher George Santayana was right, and those who forget the
past are doomed to repeat it, then this may be a good time for a
history lesson. Set the wayback machine for the early 1990s, Sherman.
We're going back to the biotechnology boom on Wall Street, a
development with some eerie parallels to the current mania for Internet
stocks. Notes Katherine Kirk, an investment banker with Hambrecht &
Quist in Boston: ''Investors are in love again.''
Biotechnology stocks took off in 1990 when one of the industry's leaders,
Amgen Inc., produced the first biotech blockbuster, a key drug for kidney
dialysis patients. For investors the message was clear: Biotech was ready
to move from the laboratory to the marketplace. Diseases would be cured;
money would be made. Hardly any biotech companies were making
money at the time, but that didn't matter. Profits took a back seat to
potential.
Amgen's stock price rocketed from 7 to 78 in a short period of time. In
1991, Fidelity's Select Biotechnology fund climbed an astounding 99
percent and its assets ballooned from $70 million to $1.1 billion in less than
two years. It looked as if the sky was the limit.
Only it wasn't. In early 1992 the stocks started to tumble as investors
questioned some of their early assumptions. And in the spring of that year,
when the US Food and Drug Administration refused to approve drugs
from two of the highest-flying biotech companies, the rout was on. The
stock price of Centocor Inc., one of the spurned companies, fell from 60
to under 10.
Biotechnology didn't disappear. A handful of companies, including Amgen,
have gone on to become large, profitable businesses.
But investors never made the kind of money they dreamed about in those
heady days. The Fidelity biotech fund, for instance, has less money in it
today than it did at the peak in 1991. Hambrecht & Quist's own biotech
index is no higher than it was back then.
''It's as if we had a wild New Year's Eve Party and the hangover lasted
years,'' says Brian Stack, portfolio manager of MFS New Discovery fund.
Investment pros who lived through both periods will tell you there are
important differences between biotechnology and the Internet. Biotech's
progress in bringing products to market was agonizingly slow; the Internet
seems to grow at lightspeed. Biotech had the potential to change medicine;
the Internet may yet change every business it touches.
But there are parallels between the two booms as well, say money
managers. And perhaps a few cautionary lessons too. What can we learn
from studying the biotechnology bubble?
1. It's hard to pick the ultimate winners at the beginning.
Imagine you are a farmer planting seeds in the spring. Can you say, at that
point, which plants will grow tall and straight and which will never sprout?
An investor evaluating companies in an emerging industry is in much the
same position.
''You are dealing with a new technology and no one knows how the story
will play out,'' says David Stone, who followed biotechnology stocks for
the Boston office of Cowen & Co.
Amgen and Centocor were both early biotech leaders. One soared, the
other stumbled, at least until recently.
And Biogen Inc., a Cambridge company that has been a Wall Street
favorite, didn't come on the radar screen until 1996.
2. Sometimes it's even hard to know who the players are.
Investors assumed that biotechnology was a world unto itself. They were
wrong. At the same time biotech companies were busy in their labs, the
major drug companies were even busier working on blockbuster drugs for
the future. With the benefit of hindsight, investors who believed in the
promise of biotech should have been investing in companies like Merck &
Co. and Pfizer Inc.
Similarly, the Internet is viewed today as a distinct field with distinct
companies. But who is to say that the ultimate winners in the Internet
competition won't be established names like Wal-Mart or IBM rather than
Amazon.com and Yahoo?
3. Euphoria has a way of blinding people to risk.
In their enthusiasm for biotech stocks, investors failed to appreciate how
long it would take to turn good ideas into marketable products. With the
Internet, the risk may be just the opposite. Because there are practically no
barriers to entry, just about anyone can jump into the Internet business
overnight.
''We're dealing with a much fiercer competitive landscape,'' says Kirk of
Hambrecht & Quist. In such a world, she says, competitive advantage can
vanish as quickly as it appears. Which leads to an obvious question: Is that
risk built into the price of Internet stocks?
4. Promise is not the same thing as profit.
Thomas O'Neill, chief investment officer at Fleet Financial Group Inc.,
says it was hard not to be excited by the potential of biotechnology.
''You were talking about curing diseases,'' he recalls. ''These were exciting
things.''
The Internet has the same kind of buzz about it. Like biotechnology, it
could change the way we live our lives. But eventually that excitement has
to find its way to the bottom line. Companies don't have to make money in
the early days. New firms can have valuations that look preposterous on
the surface.
But down the road investors need to see a real return. Otherwise, as the
biotech boom demonstrated, soaring stock prices can come back to earth
in a hurry.
Red Herring
Matthew Nestor has been named director of the state securities division by
Secretary of the Commonwealth William Galvin.
In his new job Nestor will manage the staff that regulates the offer and sale
of securities. Nestor previously was chief of enforcement in the securities
division.
''Matt Nestor is a respected figure in the fight against investment fraud in
Massachusetts and nationwide,'' said Galvin.
Nestor is a graduate of Boston College Law School.
Steven Syre (929-2918) and Charles Stein (929-2922) can also be
reached by e-mail at boscap@globe.com.
This story ran on page D01 of the Boston Globe on 02/25/99.
© Copyright 1999 Globe Newspaper Company.
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