One of the greatest discoveries of our time – the blueprint of the human code – may take as long as 20 years to generate primal matter called long-term profits.
"Investors are still uneducated about what genomics means," said analyst Berry Summerour of the Life Sciences Research Group at Stephens Inc. "That's a big problem."
The breakthrough by erstwhile rivals, the Human Genome Project and Celera Genomics, will help revolutionize health sciences, potentially eliminating a variety of life-threatening diseases. "The language in which God created life" is how President Clinton described the discovery.
But in the short-term investors should be warned: Owning shares in genome-related companies won't make them very rich, several biotechnology analysts say. For starters, biotechnology analysts note, not all genomics-related companies will be winners. Most of the winners, moreover, won't yield dividends for at least five, 10 or even possibly 20 years, they believe.
"People were very excited about the project," said Sharon Seiler, vice president in the biotechnology department at Punk, Ziegel & Co. "Because of the media hype people were led to believe that these companies were going have a slew of discoveries of these blockbuster drugs. But that won't happen in the next one or two years."
Seiler, who worked as a lab researcher before becoming a stock analyst, added, "There's a lot of misunderstanding as to what [the genome discovery] seems to lead to."
Summerour says the process from the completion of the human genetic code – the Human Genome Project – to the creation of profitable investments will be lengthy. So lengthy, in fact, that she compares it to an hourglass.
The assembly of the human genome is in the top part of the hourglass. The narrow middle of the hourglass is some years away, as companies begin to transform information provided by the sequence into ideas that they will inevitably try to rush to market. The bottom part – the actual pay off – will be the ideas coming to fruition in the form of newly-discovered drugs based on genome sequencing information.
"The genome sequence does not by itself provide [investor] value," Summerour said. "Identifying gene function – that's where the value lies."
What companies will reap profits from the Human Genome Project? "The companies I like are the ones that will sell drugs and have the strongest biology programs," Seiler said. "They'll be able to provide revenue and margins."
Some of these companies are Arena Pharmaceuticals (Nasdaq: ARNA), Argonaut Technologies (Nasdaq: AGNT), Transgenomic Inc. (Nasdaq: TBIO), Variagenics (Nasdaq: VGNX). As of the end of July, these companies were trading in price ranges of 20 to 25.
Stratogene Holding Corp. (proposed Nasdaq: STGN), which is attempting to use genome sequence variations to see how humans and other organisms respond to drug therapies, is described by Seiler as "interesting, but a long-term prospect."
Summerour thinks that the successful companies will have the tools to analyze genome sequences. Other biotech companies worth watching are those involved in partnerships with pharmaceutical giants.
Such relationships are not only important in the long-term, but could help companies survive the long interim period preceding drug discovery. One sure thing helping many of the functional genomic companies gain credibility, especially with investors, is corporate collaboration, Summerour says. The collaborations could provide a product distribution channel for the genomic companies. "That gives them some near-term revenue to off-set their burn-rates," he said.
While the fruits of the genome discovery are still far off, there are some potential short-term benefits. "The window for biotech IPOs is still nominally open," said Winton Gibbons, a biotech analyst at William Blair & Co. "The valuations are probably half or so of what they might have been in the early part of the year, but many of [the companies that have registered] are still able to get their deals done."
Gibbons noted that "there is a lot more media play in the genomics area, and the media attention should drive, at a minimum, the retail brokerage sales."
Summerour is more confident of short-term success. "The Human Genome project has been widely publicized, making it a good education for both individual and professional investors. It's going to bring life to the sector," he said.
Is it surprising that biotech indices have not gone through the roof following the genome announcement? "Not necessarily," Summerour said. "People buy on rumors and sell on news."
That's exactly what happened as investors let biotech stocks enjoy a short-trip to the stars before jettisoning them in hopes of profits.
Omar Sacirbey is senior editor of The IPO Reporter, a sister publication of Traders Magazine.
