Online Extra: New Life for Genomics Stocks

The sector got hit hard, once investors realized these companies wouldn't produce quick hits. Now, some survivors look attractive

On May 19, Genentech (DNA ) announced that its colon cancer drug Avastin helped significantly extend the lives of some of the sickest patients. The medication is a first-of-its-kind treatment that blocks the formation of blood vessels delivering the nutrients tumors need to grow. Investors rejoiced, sending the stock up more than 40% in a single day (it closed at $56.09 on May 22). Genentech's news was the kind biotech investors live for: when the long, hard, and expensive work of developing a breakthrough product looks like it's about to pay off in spades.

Avastin seems on its way to obtaining clearance from the Food & Drug Administration. The suddenly responsive agency's recent raft of approvals have helped spark a rebound in the beaten down biotech sector. The Nasdaq Biotech Index is up 19% year-to-date, and health-care-specific mutual funds have been some of the best performers among all fund categories, rising 10.5% since January, according to investment researcher Morningstar.

The biotech upturn is strong enough, that it's even helping lift the stocks of a few genomics companies, those bleeding-edge pioneers that are trying to develop drugs based on recent discoveries of what genes really do in the body. Investors flocked to them beginning in 1999, then fled once it was clear that developing drugs from genomics data wouldn't be a quick process.


  Upstarts including Applera Corp.-Celera Genomics (CRA ), Human Genome Sciences (HGSI ), and Incyte (INCY ), among others, dropped from well above $200 a share to less than $10 -- and in some cases, less than $1. After an experience like that, health-care analysts are cautious about recommending the group. But they also see some intriguing long-term bets for investors who have money to burn and the stomach for above-average risk.

Most in favor are companies that have a game plan for delivering a product at some point, rather than just selling proprietary intelligence about which genes are involved in triggering which diseases. At best, such players have drugs in early-stage testing, meaning they won't be ready for sale for at least several more years. In the meantime, investors are focusing on the cash resources of genomics companies as indicators of their future success.

Human Genome Sciences and Millennium Pharmaceuticals (MLNM ) are perhaps furthest along in their drug-delivery efforts. Better yet, each has a treasure chest of cash: Human Genome has $1.5 billion, Millennium more than $1 billion. "[Human Genome] was clever enough to capitalize itself very well" through its initial public offering and other fund-raising vehicles, says Paul Abel, portfolio manger at New York City-based Kinetics Medical Fund (MEDRX ), which holds the stock.


  Even at a burn rate of $200 million a year, Human Genome "can stick to its knitting and develop its drugs," Abel adds. Thanks to the recent biotech run-up and talk that it may develop a vaccine product for anthrax, Human Genome closed at $12.86 on May 21, up from a 52-week low of $6 in March.

On May 13, Millennium got permission to sell its drug Velcade for multiple myeloma, a bone-marrow cancer -- the company's third drug to receive FDA approval. Investors apparently aren't deterred by the fact that Millennium bought all of its drugs from other companies -- and that none were developed using genomics research. Bill Tanner, an analyst at boutique research firm Leerink Swann in Boston, says "people care less about where the drug came from, and more that it's a drug that will be on the market and generate revenues." Millennium shares rose to $13 from $8 in the week after Velcade received approval. It closed at $13.55 on May 21.

Kinetics Medical's Abel is most keen on finding viable companies that have a novel approach to genomics. Take Genencor (GCOR ), another of his holdings. Started 20 years ago as a joint venture of Genentech and Corning (GLW ), it's one of the few biotechs making a profit from genomic info. It makes industrial enzymes -- such as the whitening agent in detergents -- by tweaking the genetic makeup of bacteria.


  Now, Genencor is trying to "leverage this kind of expertise into drug development," Abel says. The stock closed at $12.75 on May 21, close to its 52-week high of $13. In recent weeks, Genencor raised its 2003 guidance on strong first-quarter sales.

Abel is also on the lookout for companies that haven't yet made a move, such as Iceland-based Decode Genetics (DCGN ), which closed at $2.71 on May 21. "It has proprietary information no one else will be able to use," Abel says. With its partner Roche, Decode is looking at variations within the gene pool of Icelandic natives (the company has proprietary access to the country's genomic information).

Decode has found gene variations in people with conditions such as diabetes and obesity, and it figures that drugs can be developed against these genetic differences. Decode shares in the revenues of drugs that are made from such information, and Abel estimates that it could be profitable in five to 10 years.


  With products from genomics research so few and far between, Myriad Genetics (MYGN ) in Salt Lake City is also attracting attention. It has yet to bring a drug to market, but it has a profitable diagnostics business based on sales of gene tests for breast, colorectal, and skin cancers.

Weidong Huang, vice-president of New York-based TimesSquare Capital Management, calls Myriad's tests the primary reason to own the stock. Myriad's "sales of diagnostics are growing about 40% a year," he says, with a gross profit margin of 70% to 80%. The stock closed at $13 on May 21, above its 52-week low of $8 but below its yearly high of $26. Huang thinks it can go to $16 (click here for a video interview with Weidong Huang).

Huang also thinks genomics-tool company Bio-Rad (BIO ) has a solid future. It does half its $930 million in annual revenue selling research equipment used in proteomics, the study of proteins and their effects on the body n- crucial information researchers use to help find new drugs. Bio-Rad is also profitable, thanks to its diagnostics business, which includes a test for mad cow disease. Now that the deadly ailment has surfaced in Canada, Bio-Rad shares are at a 52-week high of $56.70, as of May 21.


  The difficulty in identifying such winners is dramatized by the experience of the Genomics Fund (GENEX ), which was started in the spring of 2000, just as genomics stocks began to slide. At its peak, it attracted $50 million in capital, now it has $7 million. Fund manager Bob Sullivan, who also serves as chief investment officer of Satuit Capital Management in Scituate, Mass., says he's now "trying to reconstruct the portfolio, so it's less concentrated [in genomics]."

Sullivan has been adding shares of Fisher Scientific (FSH ). Fisher, which closed at $29.50 on May 21, just off its 12 month-high of $33, makes products used in research lab experiments. Sullivan figures it's a lower-risk way to invest in genomics.

So it goes in the quest to find financial winners in the field of genomics. Plenty of players will have trouble surviving, especially those that are low on cash. However, those that have found a way to hitch themselves to a product could be eventually pay off for investors.

By Amy Tsao in New York

Before it's here, it's on the Bloomberg Terminal. LEARN MORE