This is the second part of Lissa's column on trends shaping biotech. To read more,
return to part one.
What's Ahead
As for the here and now, here's what I'm chewing on. First of all, I run a biotech mutual fund. Like many mutual funds, we were facing distribution of capital gains to our shareholders. We were lucky and the fund did well this year; our shareholders have chosen to reinvest almost all of their distribution. So I didn't have to sell a bunch of stocks and keep a wad of cash on hand in case shareholders didn't reinvest their capital gains distributions. But other funds may not be so lucky ... so I've been chewing on how much of the past few days' action was cash staying on the sidelines in anticipation of that (not to mention the triple witch).
I must say,
some investors are very conscious of distribution day. We've gotten calls asking when we would distribute. (For most mutual funds, it's two weeks after the fiscal year ends -- and most mutual funds are on a November fiscal year. Incidentally, this suggests I may get a little slug of cash in on Friday, because anyone who was waiting for the distribution to pass is now safe to invest. And the same could be true for a lot of other funds.)
How Now, Pharma?
The second thing I'm staring at is the drug stocks. Totally aside from an easing
Fed, most of the big pharmas are presumably facing an uphill battle at this moment because of Y2K comparisons. Which is to say, this time last year, doctors were advising their patients to stock up on prescriptions in case Y2K disrupted manufacturing plants and drug supplies. So results for the first quarter of 2000 looked pretty good at a lot of drug companies, even at companies like
Amgen (AMGN Quote), which explicitly broke out the Y2K bump in their sales. (Amgen then got hammered because they said earnings would only grow 8% this year, but that's another story.)
As Alex Zisson of
Chase H&Q pointed out last January, the drug stocks were trading at a 2% premium to the
S&P. (I think they're now trading at a 40% premium, and if I remember correctly, their "normal" premium is 25%.) I dunno how much higher drug stocks can go, but I owned a lot of them last March in the fund and I own zip-zero-nada now. However, other funds own a lot of pharma. Will they decide to dump those stocks in the coming weeks? I think so. Will they shift a little of that money to biotech? I think so.
After the Gold Rush
The third thing I'm chewing on right now is a monster: It comes under the heading of "tectonic shift." In a month or two,
Celera Genomics (CRA Quote) will publish the full human genome sequence -- and people will realize
there are actually fewer than 50,000 genes in the human genome. The subject arises at this moment because Celera announced last week that it handed over the entire human genome sequence to the journal
Science to be published (I presume in February).
For years, Dr. J. Craig Venter has been saying that the human genome probably had fewer than 60,000 genes. Heck, Dr. C. nailed most of them when he worked in partnership with Human Genome Sciences (which said back in 1996 that they'd found 96% of the human genes). Now Eric Lander of the famed Whitehead Institute at
M.I.T. --- a man who has had his differences with Craig --- has
also come out and said that there are fewer than 50,000 genes in the human genome.
The fact that these words have been on the airwaves for years doesn't mean that most investors have heard them. (The axiom "there are 100,000 genes in the human genome" has been pretty deeply drilled into a lot of our brains.) So at our shop, we've been proceeding under the assumption that the big genome land grab happened years ago but a large number of investors haven't noticed that fact. We also assume that most of what will transpire over the next few years will be lawsuits and cross-licensing: We refer to it as the coming "litigation conflagration."
What I'm thinking through at the moment are the implications: Specifically, how will investors react when a critical mass of them realize there are fewer than 50,000 genes -- and most of them are already spoken for?
Some Winners, A Few Losers
Where, for example, does that leave
Incyte Genomics (INCY Quote), which has said for years that it has 140,000 human genes, safely cloned and tucked in its freezers. Where does that leave
Compugen (CGEN Quote) and
Curagen (CRGN Quote) and all the other smaller genomics companies? (Where indeed -- share your thoughts on my
message board.)
I don't have a good answer yet. Celera won't publish its famed annotation to the human genome. (For that, customers pay on the order of $5 million a year for five years.) So very few of us will be able to tell
where those fewer-than-50,000 genes actually
are in the 3.2 billion base pairs of DNA comprising the human genome. CSFB's Alex To says that only 5,000 of those genes will be "druggable targets" anyway, so the issue of how many genes exists is somewhat irrelevant.
Me, I can't agree. Investors got hugely excited when they realized the human genome was about to be sequenced this year, even though that achievement was more than 10 years in the making. I
think investors will bid genomics leaders like HGSI to the moon when they realize how few human genes there really are -- and that Johnny-come-lately genomics companies may make small holes in the ground unless they can claim a really pivotal gene.
But next year, we'll see.
To read more of Lissa on biotech,
return to the first part.
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Lissa Morgenthaler
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