Great stocks on sale

Kiplinger's Personal Finance Magazine, Nov, 1998 by Manuel Schiffres

Steris is benefiting from two key trends, says Amy Selner, manager of Berger Midcap fund. The rapid growth in minimally invasive surgery boosts the need to sterilize sophisticated reusable devices. And hospitals are turning routine procedures over to stand-alone surgery centers, each of which needs to sterilize its own equipment.

Analysts forecast Steris's long-term earnings-growth rate at 23%, but Selner says she thinks that profits may grow at a clip of more than 25% per year. Earnings could get a boost, she says, from Isomedix's expertise in the use of radiation to destroy bacteria in food--a health risk that has received widespread attention as a result of illnesses and deaths involving tainted meat.

Steris's stock is well off its 52-week high of $36 per share. Analysts expect earnings of $1.08 per share in calendar 1998, and $1.31 in 1999. As a result of the recent price retreat, Steris's price-earnings ratio, on 1998 earnings estimates, is a reasonable 25.

For the most part, biotech stocks have been duds in recent years. Vital (619-646-1100) has been no exception. After going public five and a half years ago at $5 per share, its shares traded as high as $19 in early June before falling to their current level. With a market value of $166 million, the company is so small as to seem almost invisible on the corporate landscape. Yet some analysts say Vical's technology could make it a huge financial winner.

Vical has developed technologies that allow direct transfer of genes into cells inside the body to selectively correct or moderate disease conditions. The company is conducting latter-phase human trials for a product to treat melanoma, an aggressive and deadly skin cancer. It is also conducting earlier-stage trials for drugs to treat kidney, prostate, and head and neck cancers.

"Vical's approach to cancer therapy is kinder and gentler, and basically helps the immune system do what it normally does every day: eliminate cancerous and precancerous cells from the body," says analyst Peter Freudenthal of the BancBoston Robertson Stephens investment bank. "This approach is much more elegant and potentially more effective than the harsh poisons, radiation and disfiguring surgery currently used to treat cancer."

In addition to working on cancer cures, Vical has licensed its DNA technology to other companies for the development of vaccines against various infectious diseases, such as influenza, hepatitis and HIV. Vical's direct gene-transfer technology may also wind up in drugs to treat such metabolic disorders as cystic fibrosis. Vical's collaborators include leading pharmaceutical companies, such as Merck and Rohne-Poulenc Rorer.

Michael Murphy, editor of the California Technology Stock Letter, says Vical may not be profitable until 2001. He adds, though, that "once you start making money, you make a lot of it." One way of valuing a currently profitless biotech stock, says Murphy, is to compare its market value with its total expenditures over the years on research and development. The stock, he says, is valued at just 3.3 times R&D expenditures, which is what a venture capitalist might pay for a company with an idea but little in the way of product. Vical, though, has products in human trials, and that means the stock at today's price could be viewed later as a terrific bargain, says Murphy.