With the market down, many analysts have been urginginvestors to go back to fundamentals. But in the biotech sector,where most companies don't have products or other traditionalmeasures of value, investors eventually have to makeassumptions about the value of a company's technology.

And as technology development burns a company's cash, theconventional wisdom of hunting for shares that trade for lessthan two times cash becomes less useful as a barometer.

"The whole idea of a company trading at cash or two times cashcan only be taken so far," said Margaret McGeorge of Sutro &Co. "The cash is earmarked for developing technology, and itcan dwindle quite quickly. So it should be a guide, but not anend-all."

In her most recent report on the sector, Hambrecht & Quistanalyst Jacqueline Siegel wrote: "It is misleading to invest in acompany primarily because of its cash position. Cash is anecessary, but by no means sufficient, criterion by which tojudge a biotechnology company's prospects.

"Our principal investment hypothesis is simple: technology isthe life blood of the industry," she wrote. "If a company'stechnology base is excellent, unique and important, thecompany has a shot at the pot of gold."

"Valuing the technology is where it gets extremely difficult,"McGeorge said. "It's not value in the traditional sense. You'renot buying a lot of hard assets. You're buying assets that walkout in tennis shoes every afternoon."

The only way to value the technology, she continued, is tomake assumptions about the future value of the resultingproducts. "That brings you back to discounted earnings," saidMcGeorge.

Richard Stover of Stover Haley Noyes agreed. "You value acompany based on their products, and those are a function ofthe size of the market, the competitive situation and theproduct's price," he said. "Then you look at the stage ofdevelopment, and that's a good proxy for the degree of risk."

McGeorge determines a value stock by considering the currentmarket valuation relative to the company's technology andproducts on one hand and cash position and burn rate on theother. She picks Cambridge Biotech Corp. (NASDAQ:CBCX) andGenzyme Corp. (NASDAQ:GENZ) as two different kinds of valuestocks.

"Cambridge Biotech is underfollowed, has a good ongoingdiagnostics business, and an interesting vaccine and adjuvantsbusiness with important developments coming up over thenext several months," she said. "GENZ is one you can assignsome value in a more traditional sense. They can grow theirearnings 40 percent per year over the next three years, andthe stock is trading at less than one times its growth rate."

Stover said Gensia Pharmaceuticals Inc. (NASDAQ:GNSA) andXoma Corp. (NASDAQ:XOMA) are companies in late stages ofdevelopment that are comparatively undervalued based ontheir products.

"Gensia has two products in Phase III development that willeither create entirely new markets or redefine andsubstantially expand existing markets," he said. "In addition,they have a very substantial R&D effort. So they will begenerating substantial revenues and have room for substantialgrowth through their products in development."

Stover said Xoma has a good chance of having both its E5 sepsismonoclonal and CD5-Plus to treat graft-vs.-host diseaseapproved by the FDA this year.

Siegel's picks include Amgen Inc. (NASDAQ:AMGN), Biogen Inc.(NASDAQ:BGEN) and Chiron Corp. (NASDAQ:CHIR) in the top tier;ImmunoGen Inc. (NASDAQ:IMGN), Scios-Nova Inc.(NASDAQ:SCIO) and The Liposome Co. (NASDAQ:LIPO) in thesecond tier; and ImmuLogic Pharmaceutical Corp.(NASDAQ:IMUL), Glycomed Inc. (NASDAQ:GLYC) and GileadSciences Inc. (NASDAQ:GILD) in the third tier.

-- Karen Bernstein BioWorld Staff

(c) 1997 American Health Consultants. All rights reserved.