BUSINESSWEEK ONLINE : APRIL 24, 2000 ISSUE
BUSINESSWEEK INVESTOR Biotechs: Catch a Risky Wave With some stocks as much as 60% off their highs, the sector abounds with buys If the time to jump into a hot stock group is after a steep correction, biotechnology shares couldn't be more tempting. The biotech group tripled in four months. Then, in mid-March, President Clinton and British Prime Minister Tony Blair issued a statement that seemed to endanger the patent rights of biotechs. The sector took a big hit and promptly gave back half those gains. Big-name stocks slid as much as 30%. Smaller, earlier-stage companies were down as much as 60%. Now, biotech's perking up again. But there are still bargains to be had. Says Matthew Geller, an analyst with CIBC World Markets in New York: ''Now is the time to buy.'' Yes--but what, exactly? Sifting through the more than 350 publicly traded biotech companies isn't easy. Roughly a dozen--including Amgen (AMGN), Biogen (BGEN), Genentech (DNA), and Chiron (CHIR)--have enough products, profits, and potential in their pipelines to be considered the industry's blue chips. After that come the growth stories, younger companies that stand a chance of becoming the next blue chips, including Cephalon (CEPH), Celgene (CELG), and ILEX Oncology. They're riskier, but they have succeeded in getting products on the market or into late-stage human trials. They might post earnings in a year or two. But most biotechs are still at an earlier stage, struggling to move potentially novel compounds out of the lab. They're most likely to require further capital infusions, and their efforts are in the greatest jeopardy of being outmoded by new techniques. Among the embryonic companies are the high-flying genomics outfits, which are mining the human genome for information that will be the starting point for future medicines. One such company, Celera Genomics Group (CRA), announced Apr. 6 that it had finished decoding all the DNA molecules for a single human being way ahead of schedule, and would combine them into a full genome in a mere three to six weeks. Science such as this is breathtaking. But most securities analysts are leery of genomics shares; products and profits are too many years off. The safer way to invest, they argue, is to stick with the blue chips, which have demonstrated an ability to survive the 12 to 15 years it takes to bring a drug to market. Take MedImmune (MEDI), which markets a successful antibody drug for cancer. It was trading as high as 228 a few weeks ago. As the biotech group faded, MedImmune has come down to a more reasonable 168, with a price-earnings ratio of 94. Genentech, meanwhile, is down 28% from its high, to 148, which still is a rich 133 times this year's estimated earnings. ''It has one of the best pipelines in all of biotechnology, is highly profitable, and has incredible growth opportunities,'' says Kurt von Emster, who manages the Franklin Biotechnology Discovery fund. Some smaller up-and-comers could be even more promising. But beware of companies that have no products yet, says Michael Becker, editor of Beck on Biotech, a monthly newsletter (www.beckonbiotech.com). Moving a drug out of the lab and into the clinic takes so long and is so expensive that holding shares in such companies ''is a perilous task,'' he says. Instead, look for companies that have good managements and appear to be on the cusp of profitability, with solid drugs in late-stage clinical trials and maybe even a product on the market already. Becker's picks include Amylin Pharmaceuticals and Organogenesis (AMLN). Amylin is wrapping up studies on its potential blockbuster diabetes drug, Symlin. Its stock is down 23%, to 13. Organogenesis already has a product on the market, Apligraf, that promotes wound healing. Organogensis shares have slid 36%, to around 12. Other potential winners include Celgene, which markets thalidomide, a powerful cancer drug better known for its propensity to cause birth defects, and QLT Phototherapeutics (QLTI), which expects soon to start marketing Visudyne, a treatment for macular degeneration that CIBC's Geller forecasts will produce more than $1 billion in sales. Celgene looks like a steal, says Peter Ginsburg, a biotech analyst with U.S. Bancorp Piper Jaffray. Several analysts are partial to Enzon (ENZN), which is developing a hepatitis C drug; Cephalon, which markets Provigil for sleep disorders; and Aviron (AVIR), which is at work on a nasal flu vaccine. You can also evaluate young biotechs by the company they keep. Just as a partnership with Intel or Microsoft validates a rising Internet outfit, collaborations with top-tier pharmaceutical makers suggest that a biotech startup's prospects are real. ''It's a good bet that if Merck (MRK) or Bristol Myers-Squibb (BMY) likes it, there must be something in the technology,'' says Becker. Two good examples are Abgenix, of Fremont, Calif., and Medarex, in Annandale, N.J. Abgenix has signed at least 17 deals to develop antibody products for major drug companies, while Medarex has signed 15 deals. Instead of buying into genomics companies, Faraz Naqvi, manager of Dresdner RCM Biotechnology fund, prefers those that make picks and shovels for the genomic gold rush. Among his favorites are PE Biosystems Group and Invitrogen. PE Biosystems markets high-powered sequencers and other technologies that will be essential to making drugs once the sequencing project is completed. Invitrogen supplies researchers with chemical kits to help automate the laborious tests needed to decode the human genome. The biotech sector will no doubt continue to be volatile. But despite sharp downturns, analysts are certain that biotechnology is going to transform medicine. Tomorrow's blockbuster drugs, they say, will help people live happier, more active lives. Investing in the makers of these medicines could make your portfolio healthier, too. By ELLEN LICKING _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Biotechs: Catch a Risky Wave TABLE: Smart Biotech Buys INTERACT E-Mail to Business Week Online

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