Outlook for biotech stocks in 2003

I don’t know if you’ve been keeping an eye on the biotech sector. I have… but with one eye shut and the other squinting. That’s how bad things have been for biotech stocks lately.

The widely followed NASDAQ Biotechnology Index has gone from a height of 1,500 in 2000 to its current level of 500. The index lost more about 67% of its valuation in the past three years… which isn’t all that bad when you consider the NASDAQ itself has lost more—a bowel-shaking 73%.

That’s not exactly a comforting thought. And I don’t intend it to be. All I’m saying is that, given the speculative nature of biotechnology stocks, I’m thankful for small miracles.

But the start of 2003 hasn’t been encouraging.

Biotech investors thought there was some relief on the horizon as the world waited for the clinical trial results from VaxGen to be announced.

VaxGen is a biotech that was conducting a final phase trial for a new AIDS vaccine called AidsVax.

The results the company announced were interesting, to say the least.

I won’t get into the specifics, because clinical trial-speak is very esoteric. But in a nutshell, VaxGen claimed the drug was effective… but effective in only two ethnic groups: blacks and Asians.

I could be wrong about this, but if it’s true, this might be the first ethnic-specific vaccine.

I’m not holding my breath.

And the market didn’t exactly greet the news with whoops of joy.

The stock is currently trading for US$3.75. Two months ago it was trading for nearly US$20 a share.

But my outlook for biotechs isn’t all bad, as you’re about to find out.

Same argument, different year

The argument I’m making now is pretty much the same one I made in 1997: on a purely fundamental view, the biotech sector as a whole appears attractive. That’s not pie-in-the-sky enthusiasm. I can back this up with numbers.

Check this out: If you add up all the market caps of all the publicly traded biotech stocks (300+), the combined market cap is only US$378 billion.

I say “only” because I’m about to compare the entire biotech sector to just three companies: Pfizer, Merck and Johnson & Johnson. Those three companies have a combined market cap of US$475 billion. In other words, for the price of these three companies, you can buy the entire biotech sector, including biotech giant Amgen.

There’s more. Given the recent debacles in the land of biotech, the current valuations in that sector are actually quite compelling. I mean, many of the highflying biotechs of the 1990’s are now trading near, at, or (in some cases) well below cash.

Take Human Genome Sciences, for instance. During the height of the biotech bull market, Human Genome had a market cap of more than US$12 billion and a per-share price of US$100.

My members made over 100% on the stock.

In fact, I even declared that HGSI would emerge as one of the best biotechs in the world.

Today, Human Genome Sciences trades at a market cap of US$850 million, and you can pick it up for the severely discounted price of just US$6.50 a share. Though I wouldn’t recommend that you do so.

But a case can be made for HGSI. As you read this, it has a rich cash position of US$1.35 billion. That’s about US$10.50 in cash per share.

Human Genome Sciences isn’t the only biotech that has fallen on tough times.

Medarex (MEDX:NASDAQ), another small but promising biotech I was high on, has seen its market valuation chopped by as much as 97%.

In 2000, Medarex traded for up to US$90 a share.

Today, it trades for a mere US$3.00 a share. And it, too, has a mountain of cash sitting in the bank: US$369 million in long green, compared to its market cap of just US$224 million.

But Human Genome Sciences and Medarex aren’t the only biotech stocks trading at rock-bottom prices. Here’s a list of stocks that are trading near the cash they have sitting in the bank:

Given the thoroughly distressed levels many promising biotechs are trading at, I don’t see too much downside for the sector. But I don’t see much upside, either… at least until the Iraqi situation is resolved. Stay tuned!