The

(GENEX)

GenomicsFund.com has the singular distinction of being the only pure-play genomics mutual fund out there. It also had the dubious distinction of being one of the worst-performing health care funds over the past year, and was especially hard-hit this past Monday, dropping 12.8% that day alone.


Steven Newby
Fund Manager
GenomicsFund.com

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Despite the fund's poor performance since its inception a year ago, portfolio manager Steven Newby maintains that the biotechnology sector could end up delivering spectacular returns over the long term.

Newby points to billion dollar-level cash reserves in a number of the companies in which he's invested, the privatization of human genetic research and a number of far-reaching genomic projects awaiting

FDA

approval this year. Genomics, the 30-year stockbroker veteran maintains, is a significant health care development that will affect older people in this lifetime, not in the future generations of their children's or their grandchildren's lives.

TSC: Your fund is down nearly 60% since its inception, whereas the average health care/biotechnology fund is up 4.52% over the same period, according to Lipper. How can you and your investors remain optimistic about this very specialized field, given such negative returns and the current volatility of the markets?

Newby:

Without a doubt, the genomic sector is one of the sharpest-moving sectors out there. It's often the biggest winner or the biggest loser on any given day. It makes even the biotechs look slow some days.

The industry is constantly developing. It is a very cash-rich industry. It raised a lot of cash last year when genomic stocks were very much in favor. A lot of the stocks are down sharply from that period, but they did raise money when they had the opportunity to.

Human Genome Sciences

(HGSI)

, in which I have roughly 15% of the fund invested, has $1.8 billion in cash, about half as much as

IBM

(IBM) - Get Report

does. Even though they are losing money, their burn rate is low enough and their cash levels are high enough that they could go on for a decade or two. They have four drugs in clinical trials.

Genomic and biotech companies are essentially debt free, with high levels of cash, substantial intellectual capital and tremendous patent protection. They are also based on revenue-driven models, and the revenues are increasing pretty rapidly across the board for them.

These companies will also benefit from the aging population. As people get older, they require more testing and treatments, and many of these genomics companies will help people live longer. As I was getting into this a couple of years ago, I used to think that genomics would help my children and grandchildren live longer lives, but even though I am 54, I actually think it will help me live a longer life. Twenty to 30 years from now, genomics will help people be cured of many diseases, and people living healthily into their 100s will be very commonplace.

The map of the human genome that was published in

Science

and

Nature

magazines last month was also a significant step because it delineates the sequencing itself, the individual C, A, T, G letters, and how they are divided into genes. As it turns out, there are only 31,000 to 35,000 individual genes, whereas they had previously thought there were 100,000 to 140,000. That was one of the major surprises.

The main thing now is the speeding up of the discovery process. There are 60 biotech drug candidates scheduled for genomic marketing approval this year. So, the biotech/genomic industry is a very fast-growing, well-financed, exciting area.

TSC: In terms of genomics as an investment category, what kind of performance do you expect for 2001 and the near term?

Newby:

President

Bush

recently announced he would double the funding for the

National Institutes of Health

, and NIH at one point was the sole source for genomics research. Now private companies with access to the capital markets have research money, as well. So funding for genomics is certainly expanding rapidly, led by NIH and the markets. This capital is going to be very helpful.

I think the FDA is trying to speed up the approval process, which is a major bottleneck. As I said, at least 60 candidates are going to be going for marketing approval this year.

TSC: While genomics doesn't have a track record, the biotech sector, as least, has had a number of very successful years followed by steep drops. This happened in 1984, 1987 and again in 1997. Given that biotechnology/health care funds rose 54.98% in 2000, according to Lipper, do you think that biotech could be in for another fall in 2001, with your category down along with it?

Newby:

Sure. It's already had tremendous ups and downs. Many genomics stocks are 70%, 80%, even 90% off their highs. I think all of the 25 stocks in my portfolio are down, but the companies are doing well because they have billions of dollars in cash, and hundreds and hundreds of patents.

Applera-Celera Genomics

(CRA)

, which is like the poster child for genomics because they are the ones that did this sequencing, was trading at $17 in December 1999. As people got excited about the sequencing of the human genome, the stock got as high as $276, and right now it's $36, and nothing has changed.

I continue to have faith in these companies because they have a lot of cash. Celera is a company that has raised more than $1 billion in cash. Its sales are expected to top $100 million in 2001 from nothing a few years ago, so it's a very fast-paced area, and investors are continuing to get overexcited and underexcited.

Right now, they are underexcited because market performance has been poor, even though these companies are sitting on huge loads of cash with no debt and getting drugs into various stages of clinical trial. So, the interest is waning in genomics. And, of course, the market itself being so weak is no help.

But one of the reasons we are so excited about genomics is that when the market finally turns, people are going to want to be looking for what's next. They aren't going to want to be going back to the Internet. Even the telcos and the networkers are talking about declining sales, and many people think genomics is what's next. As these drugs come out of the laboratory onto Main Street, maybe the boom of 1999-2000 could return.

TSC: What are some of the current projects of the companies in which you are invested?

Newby:

Visible Genetics

(VGIN)

has a test that analyzes an HIV-afflicted person's genes to determine what treatment regimen would be most effective for them. Therapies for each individual work very differently. This test should be approved by the FDA by the 30th of April. The company is just waiting for the FDA to approve a labeling issue.

The test has also been approved for health insurance and/or government reimbursement because it's a tremendous cost-savings to them to spend only $400 for a test to find the most effective and cost-efficient medicine. This is just one genomic advancement that is going to be used very soon. Already 92 of the 100 largest testing centers in the U.S. have the machine that does this test and have been trained on how to use it. They anticipate that there are 440,000 HIV patients who could use this test effectively, and they need to be tested once a year, so that's 440,000 times $400, which would be a very nice market of $176 million or so.

Aurora Biosciences

(ABSC)

is an equipment manufacturer that makes instruments that the pharmaceutical companies use to analyze genes. They are one of the few companies that actually make money. They made $5.7 million dollars last year, unlike other genomics companies that are burning money. It's interesting that the current market capitalization of the company is just a little over $300 million right now, and it has $100 million in cash. This is typical of genomics companies.

Aviron

(AVIR)

is also one of the more interesting ones. It has a drug called FluMist for flu prevention awaiting FDA final-sales approval. Rather than getting an injection, you intake the medicine as a nasal spray. The flu normally strikes 10% to 20% of the U.S. population. That's 35 million to 50 million people, so this FluMist is going to be an exciting development, particularly because many people don't want to take a flu injection.

TSC: How did you become interested in such a specialized area?

Newby:

Just from reading about the sequencing and the mapping of the human genome, and living here in Virginia near the NIH, which is the headquarters of genomics research. I wanted to invest in a group of companies in this area because there are so many unknown variables, even with the companies I like, and because there wasn't a biotech mutual fund that specialized in just this one area I decided to start one of my own.