The Payoff For Genebusters - biotechnology industry stocks - Brief Article

Kiplinger's Personal Finance Magazine, Sept, 2000 by Brian P. Knestout, Otto Krusius

STOCKS | We now know what makes us tick. Less well known is HOW TO PROFIT from it.

NOW THAT scientists have cracked the human genome, you re entitled to wonder what's in it for you, the investor. The early word is not good: Identifying the winners in the genome race may be as hard as deciphering the human body's chemical template itself.

With a rough road map of the human genetic code complete, there are few profits to be made in further genetic sequencing, say analysts. So the trick is to turn the raw information into salable products. The resulting jumble of genomics companies scrambling to sell something makes the industry "look very much like the wild, wild West," says Raiford Garrabrant, who follows biotech stocks for the Van Wagoner funds.

Sales blitz. A handful of companies, including Celera Genomics (symbol CRA, recent price $92)--which mapped the human chromosomal set along with the government-funded Human Genome Project--will sell information on sequenced genes. Other companies plan to sell specialized research services to pharmaceutical companies looking to narrow the field of potential drug targets. And, of course, a horde of pharmaceutical companies aims to develop gene-based drugs.

The result: a morass of companies with "very interesting technologies and very cloudy business models," says Franklin Biotech Discovery fund manager Kurt Von Emster. Ten years could pass before drugs or therapeutic procedures make their way through development and the government-approval process, notes Medical Technology Stock Letter editor Jim McCamant. Some gene-based drugs might move more quickly down the pipeline, such as monoclonal antibodies, which are man-made copies of compounds the body uses to fight disease, and anti-sensing agents, which turn off specific genes within a cell. But, says McCamant, "it's not realistic to expect a number of new drugs" based on genomic research to appear much sooner than five years from now.

The slow progress of drug development is good news for the database and research-service companies because the mapping of the human genome has greatly increased the number of such targets for drug development. Since most genes have yet to be isolated amid the long strings of sequenced information (and because no one knows what most of these genes even do), the best prospects for investment are the companies that are figuring out what each gene does and which genes are best suited for further research.

Picks and shovels. That's where Van Wagoner's Garrabrant is placing his bets. "We favor companies that sell the enabling technology to discover more about what genes do, now that they've been identified," he says. Those include Affymetrix (AFFX, $188), which makes an array of gene-testing computer chips; Gene Logic (GLGC, $30), which conducts tests to discover the proteins made by specific genes; Millennium Pharmaceuticals (MLNM, $119), which both hires itself out to large pharmaceutical companies to find the most promising targets for drug development and develops gene-based drugs in-house; and Applied Biosystems, which sells instruments, reagents and software used in biotech research. (For more on Applied Biosystems, see "Future Stocks.")

Von Emster agrees. "Certainly the picks-and-shovels companies will win first," he says. Four such stocks he favors: Abgenix (ABGX, $70), which creates genetically altered mice and flies for use in research, and which develops monoclonal antibodies as potential drugs; Affymetrix; Exelixis (EXEL, $41), which compares gene sequences in animals and humans to hunt down prospective targets for development; Orchid Biosciences (ORCH, $42), which sells basic chemical reagents needed for genetic research; and scientific-equipment maker waters Corp. (WAT, $66, adjusted for a two-for-one split on August 25).

Of the highlighted companies, only Applied Biosystems and Waters are profitable, although analysts expect Affymetrix to break into the black in the last three months of this year. They also forecast database sellers Incyte Genomics (INCY, $91) and Human Genome Sciences (HGSI, $153) to generate earnings in 2001 and 2002, respectively. But most genomics companies are trading on hopes and dreams, not results. For now, at least, a more sensible way to dip into the genomics industry may come through a biotech sector fund. For more on two of the past year's top-performing biotech funds, see "Go Ahead, Play With Fire."