When Hambrecht & Quist President Daniel H. Case III recently wrote a missive to his clients on opportunities in biotech, he titled it: "now is the time to bet on biotechnology stocks." He wasn't aping e. e. cummings: He meant for the lower-case letters to signal the caution he feels. Indeed, given the negative investor psychology about biotech right now, even seasoned pros are nervous about advising clients to go near the industry.
With so many issues at all-time lows and some companies trading near or below the value of cash they have in the bank, the old saw about buying low and selling high would seem to make now the time to jump in. Yet fear of widespread failures is pervasive and the fundamentals of these still mostly productless companies are hard to measure. "You can buy at four and be at zero in two years," warns Karen Firestone, who runs the nation's largest biotech-only fund at Fidelity Investments.
That fact is prompting an investor flight to quality. PaineWebber Inc.'s Linda I. Miller says the best investment during consolidation is a basket of "large companies with successful commercial activities or visible product pipelines, including Amgen, Biogen, Chiron, and Genentech."
The stock of Amgen, for instance, has remained strong partly because it has two blockbuster products generating heady profits and partly because it has moved up on takeover rumors in recent weeks. Chief Executive Gordon M. Binder says the company isn't interested in being acquired. In fact, the board is so confident of Amgen's potential that it has spent $443 million since 1992 to buy back stock. That's hardly a ringing endorsement of the strategy some major biotech companies are following--of investing aggressively in alliances and the equity of smaller players. Insists Binder: "Amgen's stock is more attractive ... than the great majority of them."
Genentech, meanwhile, is a bit of an arbitrage play: It is 65% owned by Roche Holdings Ltd., which has an option that expires in 1995 to buy out the rest of Genentech for $60 a share. That has worked to stabilize the stock, now trading at around 50. The question is whether Roche will buy the rest or renegotiate and extend the deal. Genentech CEO G. Kirk Raab says he doesn't know what Roche is planning but says the arm's-length posture the companies have maintained has worked well to keep an entrepreneurial spirit alive at the South San Francisco gene-splicer.
Analyzing the prospects of the majority of 200-plus public companies that don't even have products to sell yet can be more daunting. Capitol Research analyst Richard Beleson sees an impending "Darwinian struggle for capital. Presumably, the best ideas will outcompete the others." Based on that assumption, Case of Hambrecht & Quist Inc. provides tips for "careful, brave, and discerning" biotech foragers:
-- Look at companies with good science and enough cash to last for several years at current burn rates. It's hard to ascertain the former, although brokerage houses provide some analyses, and industry newsletters such as BioVenture View, BioCentury, and the Medical Technology Stock Letter cover individual companies' progress.
-- Spread risk by investing through dedicated life-science and closed-end mutual funds. If you belong to the camp that believes the cycle will inevitably put biotech back in favor, such funds as H&Q's Life Sciences Investors (or Fidelity's Biotechnology Select fund) are run by seasoned industry hands who are buying "baskets" of promising stocks to better spread risk.
-- Check out incentives some promising but undercapitalized companies are offering, such as "vanishing preferred," which attract investors by offering a higher preference than common stock holders get in the event of a liquidation. The preference goes away when the shares are sold. At that point, they become common stock.
Unfortunately, with so many companies to choose from, hardly any of them with real sales or earning fundamentals to assess, urging potential investors to "selectively buy" is almost no advice at all. So forget cummings. BUYER BEWARE.
STOCK-PICKING TIPS FOR BIO-INVESTORS
-- To play it safe, stick with top-tier companies
-- Look for good science and enough cash to last
-- Hedge bets via biotech sector mutual funds
-- Some new investment vehicles such as "vanishing preferred" stock mitigate downside risk