Investors are wild about biotechnology

Stocks: Enthusiasm runs high over future profits in an emerging industry, creating market valuations in the billions.

February 06, 2000|By Mark Guidera | Mark Guidera,SUN STAFF

Biotechnology has roared back into favor on Wall Street. In a big way. Make that a huge way.

After several years of being shunned by investors, the industry, which is focused on developing new drugs and other medical treatments by replicating and manipulating the body's own defense and repair systems, is now on fire.

Investors are flocking to the risky sector, share prices are soaring, and so are the values of executives' stakes in their companies and their stock-option packages.

"I haven't seen this kind of enthusiasm for biotech since the early '90s. It's really amazing," said Alan Auerbach, a biotechnology analyst with First Security Van Kasper.

That enthusiasm -- or "frothy effervescence" as one industry expert calls it -- is being driven by several factors: a wave of new drug approvals, the closing race to map the human genome, low interest rates, and investor zeal for anything high-tech, say experts. It persists even though many biotech companies continue to post vast losses.

Among those that have seen their stock price shoot through the roof are Human Genome Sciences Inc. and PE Corp.-Celera Genomics Group, two Rockville companies that are smack in the middle of a biotechnology niche that investors are wild for: genomics, or the study of human genes and the role they play in controlling or causing disease.

The genomics sector was ignited, say analysts, by the announcement last month by Celera's president and gene research pioneer J. Craig Venter that his company has completed mapping 90 percent of the human gene map. He believes the project will be finished this year.

PE Celera, which was split off from parent Perkin-Elmer Corp. as a tracking stock April 28, has seen its shares rise a stunning 1,500 percent since June to a high of $270 a share Jan. 24. At that price, a hundred shares purchased June 24 for $1,418.75 -- just over $14 a share -- would have sold seven months for $27,000.

Celera, which trades on the New York Stock Exchange, plans to ride the rally even further, splitting its stock 2-for-1 this month and selling another 1.6 million shares in a second public offering later this year.

While not as spectacular, Human Genome Sciences rose from a 52-week low of $28.75 last February to a high of $232 last month on the Nasdaq before its Jan. 31 2-for-1 stock split. It's also capitalized on the rally by raising more than $500 million in three private placement financings since June.

The biggest industry gainer on the Nasdaq since Feb. 1, 1999, is Medarex Inc.

Shares in the New Jersey concern, which is developing a way to make antibodies better at fighting human diseases, have shot up 1,285 percent in the past 12 months. A block of 100 shares purchased in March for $287.50, or $2.875 a share, could have been sold Jan. 24 at their $72-a-share peak for $7,200.

Though Medarex, Human Genome and Celera now have market valuations in the billions, none is profitable. In fact they are burning through cash at a rapid clip and will continue to do so for the foreseeable future.

Human Genome has a market capitalization of $4.6 billion, despite losing $24 million during its first nine months last year. Celera, which is less than a year old, has a market value of $5.9 billion and lost $43.7 million in the first six months of its fiscal year.

"It's definitely one of the hottest sectors right now," said Evan Sturza, who has followed the industry for a decade and is founder of Sturza's Medical Investment Letter and Ursus Capital, an investment service. ranks the industry the third-hottest, ahead of communications, during the past three months, gaining 44 percent overall, as a number of factors converged.

In periods of relatively low interest rates, such as now, investors historically favor stocks over fixed-income securities such as bonds despite the higher risk. Plus the growth of the Internet and dot-com companies has fanned enthusiasm generally for emerging technologies, Sturza said.

Add to that the expectation that a map of the human genome -- the full set of 100,000 to 150,000 human genes -- will be completed soon, and you have investors madly driving up shares of gene research companies such as Affymetrix Inc. and Incyte Inc. on the expectation that the map will yield a bounty of medical breakthroughs and new drugs. Despite investors' rush to get in early, analysts caution that such drugs could be years away and that it's not clear which companies will be winners.

More fundamentally, say analysts, the sector's resurgence has been driven by the growing ranks of companies getting drug products approved by regulators and turning profitable.

Alexander Cheung, senior portfolio manager for Bethesda-based Monument Funds Group's Medical Sciences Fund, says the rally is being driven primarily by new drug approvals. Twenty-two new drugs, vaccines or expanded indications for existing treatments were approved by the Food and Drug Administration last year.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.