By Steve Sternberg

Special To BioWorld Financial Watch

Matthew Murray has dedicated his professional life to mining gold, not from the ground but from the biotech revolution now gaining momentum worldwide. Yet, said Murray, investors can learn a critical lesson from the heady days of the California gold rush.

"There's an old saying that the only people who made money during the gold rush were the people who sold picks and shovels to the miners," he said.

Murray, portfolio manager for Alliance Capital Management LP in New York, relied on much the same reasoning when he formulated plans for a unique biotech fund that made its debut on July 10 and closed to new investors on July 24 with $500 million in assets. A tool is a tool, he reasons, whether it is crude or sophisticated, whether it digs holes or sequences genes.

Without rapid sequencing and ultra-sophisticated DNA arrays, Murray said, there can be no biotech revolution. Topping the list of 39 firms that Murray has tapped as potentially profitable investments is Applied Biosystems (formerly PE Biosystems), which makes the machines that sequence DNA. Rival Affymetrix Inc. ranks fourth on the list. Sandwiched between the two are Human Genome Sciences Inc. and Millennium Pharmaceuticals Inc., genomics companies trying to make drugs. MedImmune Inc., Genentech Inc., Amgen Inc., Immunex Corp., Ares Serono and Waters Corp. complete the top 10.

"Genomics companies will revolutionize health care in the same way the Internet has changed the technology sector," he said. "I believe that genomics will outperform not only the broader market over the next few years, but also the health-care market as a whole."

The fund, called the "Select Investor Series Biotechnology Portfolio," is still a risky proposition. Some of the firms on the list have yet to make a profit. Still, Murray said, they may be worth sinking money into for the long haul. "Affymetrix doesn't even have earnings yet, but it has the best DNA arrays out there. That's technology that doctors will need in the future," he said.

Where does Murray get the expertise to make such judgment calls? Besides his seven years as a biotech analyst and his responsibilities as co-manager of Alliance's select health-care fund Murray's credentials are gilt-edged. He earned his undergraduate degree in molecular biology from UCLA and his Ph.D. in biophysics from the University of California at Berkeley. And he spent four years working on the Human Genome Project, the publicly funded effort to sequence the entire human genetic code.

Murray's knowledge, experience and instincts all told him that biotech firms are just beginning to realize their potential and that investors could benefit as well. It was this reasoning that prompted him to propose establishing a fund built on the most promising genomics firms in business.

"My hope is that this sector will explode," he said.

Consider: Before scientists completed the human genetic sequence, PhRMA estimated that pharmaceutical researchers had identified 500 genes as targets for designer medications. Now that the genome has been mapped, that list is expected to grow exponentially, reaching about 10,000 genetic targets over the next few years.

That means genomics firms can be expected to produce scores of drugs, an "explosion" of drug development that will dramatically lengthen the list of roughly 75 approved biotech products now on pharmacy shelves, according to a February PhRMA survey.

Murray offers two additional arguments to buttress his faith in biotech investments. One is the nation's changing demographic makeup. "The population is aging," he said. "As the average age increases, there will be an increased demand for health care. Government studies show that, if you are 70 years old in this country, you will spend twice as much as the average American."

That trend already has taken hold. Murray cites statistics indicating that in 1990 about 5 percent of all health-care dollars were spent on prescription drugs. This year, that percentage will nearly double, to 9 percent, he said.

His second argument relies not on the quantity of drugs sold, but their quality. "One explanation for why more health-care dollars are being spent on prescription drugs is simply that prescription drugs are getting better. Doctors are finding that prescription drugs are a better way to treat disease."

The reason is that the new tools of biotechnology enable researchers to develop drugs aimed at specific biologic targets. In the past, researchers invested years in preclinical studies of the underlying mechanisms of disease, which depended heavily on the creation of animal models of human illnesses. Today, researchers can rapidly generate volumes of information about the nature of human disease and the regulation of biologic systems simply by using biotech research tools, including gene sequencers, monoclonal antibodies and knockout mice.

Fund Earmarks 65% For Biotech, Genomics

"I don't think we're as reliant on animal models as we used to be," said Thomas Schaible, senior director of medical affairs at Centocor Inc. in Malvern, Pa. "We understand a lot more about the mechanisms underlying disease. Clearly, this has shortened the [drug discovery] process."

That means the pace of drug development will most likely accelerate, producing better medicines than ever before, with fewer side effects. Murray said the Alliance fund is uniquely positioned to take advantage of these trends. Under normal market conditions, the fund's literature states, Alliance will invest at least 65 percent of its assets in biotech and genomic firms, and as much as 35% in pharmaceutical companies. Up to 40 percent of the fund may be invested in securities of non-U.S. firms, though no more than 25 percent may be invested in securities of any single foreign country.

Alliance notes that the fund is subject to "substantial risk," because the "stock market performance of biotechnology stocks can be dramatic in both directions." The fund was promoted to investors willing to gamble at least $10,000 that the biotech industry will someday fulfill its promise. Nevertheless, Murray said, "Alliance has been very careful to make certain we do not take in any more money than we can invest. That's why we capped the fund at $500 million. We think there's room to take in additional money gradually, but not at a tremendous rate. We will be very careful."

Murray derives satisfaction from the fund's popularity, despite its risks. "I'm really quite proud," he said, "that we're turning money away." *