Biotech Lifers Mull How to Fend Off the Hot-Money Blues

Stay in the bigger, later-stage companies, long-term investors recommend.
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Wall Street to biotech daytraders: Thanks, but no thanks.

This week's long-awaited

correction, which knocked roughly 20% off biotech stocks before they regained some ground Wednesday through Friday, has long-term biotech investors (yes, there are some of those) hoping they have seen the last of momentum-driven free-falls.

Though that's probably a little far-fetched, many of these investors agree that the best way to keep your shirt on is to focus on the less speculative, later-stage biotechs, such as big-cap biotech standard


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. And for now, most players don't expect a continued deep selloff throughout the sector, although indiscriminate selling was the hallmark of this week's action.

Go Away

Long-term investor Michael Ehrenreich knows what he wants from the momentum players whose interest is credited with the sector's 100%-plus returns this year and last, as well as this week's selloff. "I hope they find the next hot thing and leave this sector alone," huffs Ehrenreich, president of


, a New York broker that favors long-term biotech investing. "A little knowledge is a dangerous thing."

Analysts agree. "The understanding of these companies is terrible," says Paul Boni, biotech analyst at

Punk Ziegel

. "Clearly, people were just throwing money at this sector as fast as they could, and that's not a good sign."

"Most people don't understand the science," explains Eric Ende, biotech analyst at

Lehman Brothers

, whose brokerage has advised companies including



and others.

Out of Control

For Ehrenreich and others, the underside of the biotech boom is the looming prospect of a crash. These investors worry that speculators armed with little more than the latest rumor out of Internet chat rooms will turn this week's promising companies into next week's charred wreckage, as they flee the sector for whatever looks hotter. Emerging markets, perhaps?

For reinforcement on this theme, they point to this week's downward spiral, which observers agree was prompted by a joint U.S.-U.K. statement affirming that researchers should have free access to the emerging body of human genetic information. Even though the statement also endorsed intellectual property rights that underpin drug development, speculators punished companies having anything to do with genetics, such as


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Human Genome Sciences





. The fire then spread to the rest of the sector.

The swift reversal left veterans shaken. Roy Whitfield, Incyte's CEO, says that in the past, biotech company shares would collapse when a product in late-stage clinical development failed. But "those were real events," adds Whitfield. "This week, there hasn't been a real event. The whole thing is a bit of a mystery."

Back to Basics

Still, few observers expect a deeper wholesale selloff, as happened in 1992, when biotech stocks last spiked before collapsing into a long slump that finally abated last year. These observers predict that investors will return to buy shares of companies with products in late stages of development or technology that is essential for assisting drug companies make billion-dollar drugs.

"People will be focusing on later-stage companies," says Ende of Lehman Brothers. He mentions



and Amgen as examples of firms that generate revenue from products on the market. Investors can assess such companies by standard measures, rather than assessing the prospects for complex scientific products, he points out. He reckons investors should buy both Amgen and Medimmune.

As always, some fund managers say they saw it coming late last year, when shares in companies including






and others suddenly surged, backed up by few of the company announcements that traditionally raise or lower market valuations.

"It was only a question of time," says Roland Maier, a fund manager with

BB Biotech

, a $2.5 billion Swiss fund that's one of the world's biggest biotech investors.

BB Biotech, which holds about 20 mostly U.S. biotech stocks, shifted about 6% of the fund's capital into cash at the end of last year in anticipation of a slip in biotech stock values. "We had expected the correction at that time," says Maier.