BUSINESSWEEK ONLINE : JUNE 12, 2000 ISSUE
COVER STORY

The Slow, Painful Path to Payday in Genomic Stocks
Some of the biggest winners could be lurking among today's lesser-knowns. Just don't expect them to jump out at you

Mapping how genomics companies will do on the stock market is a little like mapping the human genome itself. Whether you're an investor or a scientist, the going is slow, and the finds are often incredibly difficult to decipher, but the end promises great riches. The problem is you'll have to follow a long, winding helix to get there.

Take a look at the 20 to 25 companies in an emerging field called proteomics. This involves searching for protein interactions in the body that may cause diseases ranging from diabetes to dementia to cancer. Scientists believe the secrets to many diseases lie hidden within the interactions among roughly 300,000 different human proteins. And probing the billions of interactions among these proteins for clues has become one of the hottest fields in genome research.

Just one problem: Don't expect to strike gold in these stocks anytime soon. Proteomic stocks are likely to go up and down in wild swings. And while some genomic stocks already command premium prices, the payoff is still a long way off, most analysts agree. "The market has reacted to genomics by falling in love with it like it did with the Internet, yet most investors have no idea what the technology can do," says The Sage Group's Gordon Ramseier, a longtime consultant to the biotech industry and a critic of the momentum investing that has surrounded genomics stocks recently. "Those who think the returns on this science are right around the corner will be surprised to find that it's not."

SMALLER PLAYERS. Most of the current hoopla surrounds five genetics pioneers: Celera Genomics (CRA) and its parent, PE Biosystems (PEB), Incyte Genomics (INCY), Human Genome Sciences (HGSI), and Millennium Pharmaceuticals (MLNM). All of these stocks command a steep price -- upwards of $100 a share -- in the market. But beyond the five early movers lies a host of arcane smaller players that are flush with cash, high on promise, but also fraught with risk and lacking much in the way of sales and profits.

Ramseier is right. The field has much in common with the Internet startups of a few years ago. These baby biotech firms have years ahead of them before profitability, but everybody wants to get in early. A second round of furious biotech investing is bound to happen when Celera Genomics announces its has completely sequenced one person's human genome. Before getting swept up in the excitement, remember that today's genomics movement represents merely the beginning of a long, slow transformation in biotechnology that very likely will crown only a few big winners -- leaving dozens of today's newest companies in the dust.

Still, analysts recognize a few dozen companies that could become the next pioneers in genomics research. Besides the five leaders, this set includes Affymetrix (AFFX), which has developed a technique for arranging DNA for analysis that is becoming an industry standard, and Nycomed Amersham, a European maker of DNA sequencing machines that competes with PE Biosystems.

BIG BACKERS. Then there's Myriad Genetics (MYGN), which has developed a technology called ProNet. It is used in finding proteins that could become easy targets for medicines that neutralize the proteins as disease-causing agents. The technology has attracted great interest from large-cap pharmaceutical companies. Collaborations with big drugmakers tend to validate a biotech firm's technology, and Myriad has lined up $150 million in partnerships with some majors, inlcuding Bayer, Eli Lilly, Novartis, Roche, and Schering. These companies subscribe to databases from Myriad that may contain drug targets for cancer, rheumatoid arthritis, and asthma, among other diseases.

"Myriad is one of the leaders," says Jason Reed, analyst for Oscar Gruss & Son. "Everyone in the field regards this science as one of the most important areas of research and one which will undoubtedly be pioneered by companies like Myriad and funded by large drug-development companies." Reed recommends Myriad's stock, which traded June 1 at $77 a share, as a buy. That's long way down from a March high of $232.

While the genomics movement has focused on sequencing the 100,000 human genes and finding the roles that some DNA segments play in causing disease, companies such as Curagen (CRGN) and Myriad are taking the science a step further by looking at the proteins crucial to carrying out virtually every bodily function from metabolism and digestion to warding off pathogens.

"EXTREMELY DIFFICULT." Michael Becker of Wayne Hummer Investments says Myriad catalogs tens of thousands of protein interactions annually. But he favors Cytogen (CYTO), a company that takes Myriad's protein-interaction screening a step further by using high-powered computers to catalog as many as 200,000 interactions each month. If it sounds complicated, it is. "I don't think the average investor, or even most of Wall Street, understands why the functional proteomics companies are the Holy Grail of drug discovery," says Becker, whose firm holds a position in Cytogen and other genomics stocks. "This stuff is extremely difficult for people to grasp."


John D. Rodwell, president of Cytogen's AxCell Biosciences subsidiary, says the databases assembled by his company will contribute to the shifting dynamic of drug discovery. "All drugs in use today were developed against 400 to 500 drug targets, which are sites of action where a drug takes effect," Rodwell explains. "Now consider how these numbers are going to explode as we assess the huge number of proteins which are potential drug targets. There's a massive amount of information that pharmaceutical companies are going to have to distill," he says.

Translation: These companies are years from making a profit. For example, for the nine months that ended on Mar. 31, Myriad posted a 35% increase in revenues, to $25 million, but still showed a loss of $6.2 million, mostly due to high R&D costs. The stock, which has been quite volatile, is expected to have an earnings per share loss of 86 cents for the year ending June 30. And that's one of the hot stocks in the proteomics area.

OFF THE RADAR. If and when companies like Myriad take off, "they are more likely to share most of the cash flow from discoveries with larger investors," says Viren Mehta, whose firm Mehta Partners is scrutinizing the chances for profitability at several genomics outfits. "We have to force that issue, even though it may seem premature," Mehta says. Much of Wall Street shares Mehta's concern. S.G. Cowen, for instance, recently dropped coverage of Myriad, a sign of that firm's frustration with the biotech company's business plan.

Myriad at least shows up on analysts' radar screens. Cytogen's stock gets scant coverage on Wall Street. The company hasn't lined up a single subscriber to its database, and it desperately needs a big name such as Pfizer or Merck to validate its technology. Without a partnership, Cytogen shares could continue falling. The stock reached $20 during the biotech boom in March. Since then it has fallen to $4.40.

Feeling lucky? Myriad might look like a bargain right now to some investors. But this volatility won't go away, analysts say. This is where the risk lies, says the Sage Group's Ramseier. "There's a tendency to believe genomics companies are almost mystical," he gripes. "Wow, a genomics company. Nobody asks the question, 'How is this company going to make any money?' It's always: 'This is the future, this is what I should be investing in.'"

"SYMPATHY." Even the savviest investors, pros like Dr. Faraz Naqvi, a biotech money manager for Dresdner RCM, cautions investors to be prepared for a wild ride. "We're huge believers that this is going to be a tremendous area for people to invest in, but these are incredibly difficult companies to understand, even for us," Navqi says. "I have a huge amount of sympathy for the average investor struggling with this."

Navqi suggests buying a basket of genomics stocks -- some risky and cheap like Cytogen, others expensive and well-established like Millennium, which traded at $87 on June 1. These companies and their technologies are fascinating, Navqi asserts. But with genomics changing so rapidly, buy these stocks with huge doses of good old-fashioned caution.

By David Shook in New York


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