By Nancy Volkers
Special To BioWorld Financial Watch
The modern-day map to buried treasure the as-yet-to-be-deciphered blueprint of the human genome will certainly shake up the field of medicine. But according to analysts, it's already shaking up the market.
"The biggest thing [driving the market has been the] Human Genome Project announcements," said Jon Alsenas, portfolio manager at ING Barings in New York. "Whether they were technically of high quality, and whether they have an impact as soon as people hope, that's debatable."
What isn't debatable is the incredible frequency and size of initial public offerings (IPOs) so far this year. About 47 initial public offerings were completed in the first seven months. In all of 1999, there were only 16 IPOs.
And it's not just the volume that's increased the dollars have, too. Companies going public this year have grossed approximately $4.3 billion, an average of $91 million per offering; biotech companies raised more than $1.3 billion on IPOs in July alone. Last year, total gross reached $2.85 billion, but that figure consisted mostly of Genentech's $2 billion offering in July. Remove Genentech from the equation, and 1999 IPOs raised less than $48 million per company and less than one-fifth of the amount raised in only the first seven months of 2000.
April and July were the top months of 2000; at least a dozen IPOs went off in July, and nine in April. Five companies went public during the last week of July alone, raising 65 percent of all the money raised in IPOs last year (excluding the Genentech offering).
The momentum isn't slowing. With five months still to go, more than 30 IPOs are pending. The year 2000 could be a banner one. Activity isn't even slowing for the summer, said Alsenas.
"There are lots of things in registration and quite a few on the road," he said. "And this is August. Typically, people don't even bother in August, but it's been road show after road show."
Peter Ginsberg, senior research analyst at U.S. Bancorp Piper Jaffray in Minneapolis, agrees that the Human Genome Project has been "a big plus" for biotech. However, he says, there are other, deeper reasons for the successes.
"It's about time [that the market strengthened]," he said. "The fundamentals in the biotech industry have been on an upswing for the past two or three years, in terms of new and important potential blockbuster products reaching the market. Also, last year was the first big year showing that biotech consolidation was actually happening we had always talked about it happening, but now it's actually happening."
Ginsberg pointed to positive second-quarter earnings, recent major biotech acquisitions, and anticipation by seasoned investors as three factors that have helped the market recently. "People are thinking that the fall is typically a strong time for biotech stocks," Ginsberg explained, "so some astute investors who have watched the cycles in the past are starting to step in early and get a jump on things."
Investor Base Broadens Significantly
The influx of non-specialists into the biotech market is another strong factor, Alsenas said and he's not just talking about retail investors buying stocks online in their spare time. "Now, you go to a road-show luncheon and introduce yourself . . . [I met someone] just out of school who was working for a hedge fund, his boss assigned him to biotech, and he's taking an introductory night course in biology!"
Vivek Jain, vice president of investment banking for Chase H&Q in New York, agreed that more investors, and less specialized ones, are entering biotech. "Five years ago, I could name the top investors for 80 percent of the deals . . . now I don't know who they all are," he said. "That's great on face value. The concern is, when things get tough again or there are scientific setbacks, will they have the patience and insight to hang around?"
This question is an important one a company can have a wildly successful IPO, only to wilt in popularity weeks later and eventually fall off investors' radar. That's why, Jain said, it's too early to tell what's going to happen.
"The aggregate amount of money raised, the frequency and size [of the IPOs] and the interest in these deals is mind-boggling," Jain said, "but the real answer will come 90 days from now. The way investment banks differentiate themselves is by putting owners into these companies that will be owners 90 or 100 days from now. Is this a real market or not? It's difficult to know right now."
Pending lawsuits also will shake things up, Alsenas said. "If TKT beats Amgen, that's going to scare people," he said, referring to a lawsuit filed against Transkaryotic Therapies Inc., of Cambridge, Mass., and partner Hoechst Marion Roussel AG (now Avenits), of Frankfurt, Germany. Amgen Inc., based in Thousand Oaks, Calif., filed the suit in 1997, claiming that TKT was infringing upon its erythropoeitin (EPO) patents.
"There's risk in [biotech]," Alsenas said. "Like the dot-coms, it's the same thing no earnings, incomplete information. It's a common phenomenon in the stock market; people realize that at some point genomics will be important, so they want to invest in it now and make a profit now, but it's a field they don't understand fundamentally."
To predict the end of the market run, Jain looked to the past.
"If you look back at 1991 or 1996, those [market successes] were killed by an overflow too much product came to the market," he said. "Every market was killed by an oversupply of deals."
As with all runs, this one will end, Alsenas said. The question is when. "The disappointment for those of us with a mature perspective on it is, [biotech stocks] run up together so they'll run down together." What will follow, he said, will be more rational and predictable valuations.
As it stands now, this is not the case, he said. "You know you're in trouble when you start looking at recommendations and their valuation models are based on perfection no discounts, no legitimate discussion of a failure, no minimum case," Alsenas said. "Perfection is priced into these stocks, and perfection never happens." *