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Now’s the time to make hay in biotechs
Look for consolidation this year after the massive gains of 2000
by Brian Hicks
Just the other day, a former junior researcher for the Taipan Group walked into the office.
I was a bit startled to see him.
No, he wasn’t decked out in a black trench coat and carrying a shotgun. Leaving Taipan for a promising career as chick magnet and lead keyboarder in a grunge band was his decision. This was something even more disturbing.
You see, he had dyed his hair blue.
Now this is a guy who started with Taipan about the same time I did, in 1994. I helped him find a house in Baltimore. And even introduced him to his fiancée.
But that was then.
Today, at the ripe old age of 31, he’s going through a mid-life crisis. The house is sold. The fiancée has hit the bricks. And I think he even intentionally defaulted on some school loans. He’s now touring the East Coast with a "promising local band."
This is the psychological aftermath of the Internet crash.
Too many dollars chasing too few stocks
If you look around, you’ll see plenty of hot-shot twentysomethings — having vainly imagined they’d be retiring before the age of 35 on the stock options from their Internet startups — who are now asking their fathers if the hardware store is hiring.
They thought their path to gold was paved with the paper of Stamps.com, Petsmart.com, and DrKoop.com. But Internet investors failed to acknowledge one important fact. The Internet bull market was started by too many investors chasing just a handful of stocks.
In fact, you can track the birth of the Internet bull market back to the summer of 1998.
Only a few Internet stocks were trading then: AOL, Yahoo, Amazon.com, Broadcast.com, and RealNetworks. With investors clamoring for these stocks, prices naturally shot through the roof.
This spawned the venture capital frenzy of 1999, which culminated in the IPOs of all those online gardening, automobile, furniture, and pet supply stores.
But, inevitably, the supply of stock not only caught up, it overwhelmed the demand for Internet shares. What resulted was a crash.
We could witness the same thing with biotechnology stocks this year. But instead of a crash, it’ll be a correction.
It’s fundamentally different with biotechs
Last year saw the best biotech IPO market ever, with dozens of new biotech issues coming to market.
And why not?
While the NASDAQ lost roughly 54% of its entire value in 2000 — with Internets alone dropping a bowel-shaking 93% — biotech stocks gained 62% for the year. (As you will see in our 2000 review, Taipan subscribers were able to bag their fair share of the profits with our Microcap picks.)
But don’t look for gains like that in 2001.
What with all of those biotech IPOs last year, a huge group of insiders now holding stock options are approaching the end of the lock-up period.
What will happen is this: a flood of stock will swamp the market. With an overwhelming supply of biotech stock hitting the trading floors, share prices will naturally decline.
Opportunity knocks twice
But I consider this a buying opportunity, because biotechs have replaced high-techs as the next big growth sector.
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MedImmune (MEDI:NASDAQ)
Following in the footsteps of Amgen, MedImmune produces two FDA-approved drugs, Synagis and CytoGam. It’s a great long-term buy under US$55 a share.
Aviron (AVIR:NASDAQ)
Aviron’s lead product, FluMist, is an influenza vaccine delivered by nasal spray. Grab it under US$50.
Inhale Therapeutic Systems, Inc. (INHL:NASDAQ)
Inhale is creating a new drug delivery system, in the form of aerosolized powders. They’ve got an inhalable insulin that could be a blockbuster. I rate IHNL a buy anywhere under US$38 a share.
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And, unlike Internets, there’s a mountain of reasons to buy biotechs. For one, biotechs are still incredibly cheap. I know, I know, the AMEX Biotechnology Index climbed 62% last year. It was the best performing index of the entire market.
But that doesn’t matter. Biotechs were absurdly cheap to begin with. The entire biotech sector (nearly 400 publicly traded stocks) doesn’t equal the combined value of just two big pharma companies, Pfizer and Merck.
Yet the lion’s share of the future growth and product pipeline remains in the biotech sector.
Moreover, unlike Internets, biotechs have been around for a quarter of a century. The sector is profitable. Amgen, for instance, is expected to net US$1.5 billion this year. Amgen’s net profit is more than Yahoo’s gross revenues for the past five years combined!
Third, unlike Internets, it’s difficult to duplicate the business model of an Amgen, MedImmune, Millennium, InHale, or Aviron.
Patent protection and US$500 million in drug development costs are high barriers to entry.
So, even though I believe 2001 will be a flat year for biotechs, I consider it a golden opportunity to accumulate shares of the next growth sector on the cheap.
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