Biotech With Fewer Ulcers

Biotech stocks have long given investors the jitters. This year, the Amex biotechnology index has seesawed widely, culminating in a recent runup that has brought it close to the Standard & Poor's 500-stock index (chart). A rash of upbeat company reports, plus a general turn toward smaller cap stocks, partly accounts for the upswing. But even in this ebullient climate, several stocks have seen their market caps disintegrate. That's why it's important to choose stocks carefully before diving into such capricious currents.

Everyone wants to find the next Amgen, but remember that only a handful of the 300 or so publicly traded biotech companies make a dime, and most new drugs fail. One way to better your odds of success is to determine the right moment to jump in. Biotech stocks often rise in the autumn as optimistic news filters out of medical and investment conferences. But Richard van den Broek, an analyst with Hambrecht & Quist, says data show that often the best time to invest is after a favorable vote by a Food & Drug Administration advisory panel.

This move is the last step before final approval. "It is less likely you'll make five times your money," he says, "but also less likely you'll lose half your money." In one classic example, when an FDA panel recommended Centocor's ReoPro, a cardiovascular clotbuster, in June 1994, Centocor's stock jumped 1 3/16, to 13. By the time ReoPro received final FDA approval six months later, the stock had hit 18 1/4. It's now around 51.

Another strategy is to construct a technologically balanced portfolio, says Viren Mehta, a partner in the health-care investment firm of Mehta & Isaly. Mehta says to use as an anchor a profitable company such as Genzyme, whose cash flow is expected to grow at an annual rate in excess of 20% through 2000. Then, pick companies like Millennium Pharmaceuticals and Incyte Pharmaceuticals that take different approaches to exploiting genomics, a science that probes links between genes and disease. Millennium has yet to make money, but it is allied with several pharmaceutical giants in areas from diabetes to central nervous system disorders. Incyte, which is profitable, licenses genetic data to other drug firms.

Mehta recommends rounding out the portfolio with drug-design companies that try to determine how cells function. One pick: Agouron Pharmaceuticals. Mehta thinks it will begin making money in the fiscal year ending next June, as sales of an AIDS remedy, Viracept, gain momentum.


Tim Wilson, global head of biotech research at UBS Securities, favors a profitable Canadian outfit called BioChem Pharma, producers of 3TC, an AIDS drug whose components show potential for treating hepatitis B. 3TC should rack up $773 million in global sales this year. BioChem is trading at 27 times next year's estimated earnings.

If you're reluctant to go stock-by-stock, you could try a sector fund. At GT Global Health Care, up 20% this year, portfolio manager Michael Yellen sees long-term value in Protein Design Labs, whose kidney transplant drug Zenapax is close to getting FDA approval, and Guilford Pharmaceuticals, which produces a brain-cancer drug.

The gyrations of biotech stocks make them a risky play. But if you're choosy--and lucky--they can give your portfolio a healthy kick.