Think Small - biotechnology stocks - Brief Article

Kiplinger's Personal Finance Magazine, April, 2000 by Robert Frick

STOCKS | After a big run in 1999, can BIOTECH STOCKS keep going? Yes, but look beyond the blue chips.

AFTER A YEAR of extraordinary gains, the new credo among biotechnology analysts is "think small." Not small returns, just small companies, because the bigger names in the industry have been run up in price from thrift-shop specials to baubles at Tiffany's. Last year biotech stocks gained 111% as measured by the mainly big-company Amex biotech index.

There may be more to come. The rate of biotech breakthroughs continues apace. Last year 32 new biotech chemicals spawned 80 new drugs, and those numbers are expected to increase to 50 new chemicals and 100 new drugs, says Michael Murphy, editor of the California Technology Stock Letter.

Moreover, extraordinary amounts of investment capital are pouring into these companies, even the real wild cards, says Faraz Naqvi, head of Dresdner RCM Biotechnology fund. Naqvi's fund proves that great gains are still possible: Dresdner RCM Biotech led the sector in 1999 with a 111% rise, and it has risen another 56% so far in 2000.

Naqvi is partial right now to genomics companies--firms that map human genes and sell the information and techniques to drug developers. Genomics companies are "picks and shovels" businesses, meaning they supply tools to drug developers. Among Naqvi's favorites: Gene Logic (symbol GLGC, Nasdaq, recent price $70), which sells products that help scientists figure out which genes are functioning in certain cells. This knowledge cuts down on the time and money spent developing drugs. Through the third quarter of 1999, revenues totaled $14 million, up from $9 million for the same period in 1998; its net loss shrank from $41 million to $15 million.

Among the most-sought-after drugs are antibiotics. Cubist Pharmaceuticals (CBST, Nasdaq, $35) is one of the "few companies working with novel antibiotics that can kill super rates of infection," says Kurt von Emstar, manager of Franklin Biotechnology Discover fund. Cubist has yet to turn the corner to profitability, and while its revenues hit $5.4 million last year--triple its revenues in 1998--it lost $17.8 million, up from $11.8 million a year earlier.

A safer bet: Ligand Pharmaceuticals (LGND, Nasdaq, $19), which this magazine first reported on in February 1999, at $11 a share. Analysts expect Ligand, which develops drugs that manipulate cell growth, to turn a profit this summer. Profitability and a boost in its stock price should attract buyers, says James McCamant, editor of Medical Technology Stock Letter. "Once Ligand gets past $20, institutions will love it."