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  The turbulance in biotech ridicules the quaint notion of efficient market theory, our contrarians say.

BENJ GALLANDER and BEN STADELMANN

Saturday, April 15, 2000

Biotech is in fashion and now it's tied up with a "new economy" ribbon. As fascination with Internet stocks topped out, biotech became the next red-hot property. These technologies are so ubiquitous that they cut a wide swath in the pharmaceutical industry. The term "genomics" is getting more play -- though it is unlikely to show up in your spell check -- concentrating on the part of the business with the widest blue-sky potential.

But new economy? Hardly. In 1973, Herbert Boyer and Stanley Cohen launched the age of genetic engineering with their work in what they called recombinant DNA. The Supreme Court ruled in 1980 that genetically altered organisms are patentable, giving Exxon the rights to a little oil-eating critter. Then in 1990, the U.S. government sponsored Human Genome Project got under way, an ambitious scheme to create a complete, accurate map of the human genome, with all 100,000 genes identified and sequenced into their three billion base pairs.

The first stock market biotech bubble got going with Genentech Inc.'s famous initial public offering in 1980. By January, 1984, the cover of Business Week proclaimed "Biotech Comes of Age." Analysts insisted that companies with no profits that were selling at 50 times sales were actually less risky than the pharmaceutical giants because there were "no old products which need to be offset because of their declining revenues." Sound familiar?

Within a few years it was effectively over, the vast majority of the young companies collapsed, never managing to get a Food and Drug Administration approval. Even products that fared better, like Interferon, the supposed cancer wonder drug, ended up disappointing investors.

Perhaps no other company exemplifies the resurgent industry as well as Celera Genomics Group. The company started out life last June as a tracking stock of PE Corp. at $10.75 (U.S.) a share, split-adjusted. After a modest start, the stock took off in July. Then as the biotech boom intensified it pushed up over the $200 mark. The desire for stock was so intense that the company obliged and printed up another $900 million worth of shares at $225 a pop.

Then came the March press release from U.S. President Bill Clinton and British Prime Minister Tony Blair reaffirming that the genetic map should be offered to researchers. Analysts blamed these leaders for the sudden swoon in gene stocks. Then last week Mr. Clinton readdressed the issue, reiterating that while the map should be freely distributed, the medical applications of gene discoveries should be patentable. This time the President's comments coincided with a recovery in the lead biotechs, for which he was immediately awarded credit.

Some journalists insisted that Mr. Clinton had indeed changed his mind, though they were clearly watching the ticker rather than reading the texts of his speeches. Celera's wild ride, from a high of $256, down to $80, and back up to $150 -- all within a month -- cannot be explained by the news or presidential pronouncements, no matter how poorly reported. The recent turbulence in the biotech sector ridicules the quaint notion of "efficient market theory." These mammoth price changes have nothing to do with the underlying fundamentals, but are a pure expression of the extreme swings of supply and demand.

As noteworthy as Celera's achievement is, there are a lot of steps ahead. First all the sequenced bits must be put together like a fiendishly complex jigsaw puzzle -- a process likened to creating the instruction manual for human beings. But we think a "parts list" would be more accurate.

Even with a detailed map, it may take decades of research until the subtle interactions between different genes and how they control the body's processes are well understood. Eventually this will result in some amazing medical breakthroughs, but for the foreseeable future, the best product companies like Celera can offer is hot action for day traders.

Our own entry in this sector is a very different sort of animal. We picked up Molecular Biosystems Inc. in December, 1998, at $2.56, well after its own period of hype and glory when it reached $40. In stark contrast, this company has an FDA-approved product that is being used in North America and Europe and just started trials in Japan. Optison is a contrast agent that improves diagnosis of heart disease through clearer ultrasound images. Sales are ramping up as it becomes more familiar to the medical community.

Our dull little company has been caught in the turmoil that has afflicted its brethren. In the past four months we saw it crash to 62 cents, jump to more than $4, then slide back to the current price of about a buck. Granted, part of this can be explained by an abortive takeover by Palatin Technologies, another budding research company with no revenue but lots of promise. We would not be surprised to see another attempt at a buyout of Molecular, probably by a firm with a little more muscle. In the meantime, we will avoid grandiose biotech speculation.

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