Biotech May Be Flying Too Near The Sun Again

Here we go again: Biotechnology stocks are on the move. Since the beginning of October, over-the-counter biotech stocks have climbed some 16%, vs. 0.2% for the Standard & Poor's 500-stock index. In press releases, analyst reports, and financial publications, the drumbeat is ongoing. The companies would like you to believe that events of consequence, bespeaking the stunning potential of the industry, are behind the rise.

But consider Synergen Inc., which moved up 2 7/8 last week--a 5% gain--on the unremarkable news that it had finished enrolling patients in a clinical trial of a new drug and would start a new phase of testing. Or Gensia Pharmaceuticals Inc. in San Diego, whose shares climbed 10% on the same day. The market's rejoicing was prompted by the expected announcement that it would file for approval to market a drug to prevent heart attacks in surgical patients. All this is akin to the market going bananas over headlines such as "Focus Group Continues Study of New Toothpaste" or "Ford Confirms It Will Proceed With Plans for Cars."

Here comes another biotech stock cycle--a mind-numbing melange of confusing or banal "progress" reports, combined with a strong dose of market momentum. And if all this has a familiar ring to it, that's not surprising. About this time last year, biotech companies were punching through their all-time high marks for pretty much the same reason. By spring, however, the hype was gone, and the market mercilessly chopped the shares of big and small, savvy and bumpkinesque companies. That left slow-moving biotech investors in a very bad mood.

They've been brightening a bit lately. Optimism over President-elect Bill Clinton's support for boosting high-tech companies through tax incentives has superseded fears that he would crack down on drug pricing once he takes office. (That makes sense, because companies that don't have anything to sell haven't much to fear from price strictures.) Meanwhile, quite a few companies have been moving up, analysts say, because they'll be presenting promising data at medical meetings in coming weeks. The medical-meeting-movers include Biogen, Centocor, and Immunex. Others have gained because of short-covering by short-sellers who had "overstayed their welcome on the downside and got spooked," says Alex. Brown & Sons Inc. broker Michael G. King.

THE SPORTS-CAR FACTOR. Quite a few buyers have been egged on by new theories on how to "bottom-fish" for cellar-dwelling biotech issues. Some pundits recommend exotic investing formulas to spot undervalued stocks, such as dividing shares outstanding into research and development spending or toting up the ratio of PhDs on staff to shares outstanding. Unfortunately, they neglect such factors as the number of shiny sports cars in a biotech company's parking lot--a common symptom of the dreaded "self-enrichment" syndrome that even gene-spliced drugs can't cure.

How much time is left for investors to experiment with these finely tuned "strategies"? Oppenheimer & Co. analyst Jeffrey Casdin believes the current rally could be a quick fizzle once short-sellers finish covering their positions. But others predict a strong rally at least through January. The momentum is, they say, too strong to resist. Says Sutro & Co. broker Richard Bock: "Most people who do well just play biotech when it's moving."

In other words, the Greater Fool Theory is at work here. Which is fine--so long as you're not the greatest fool.