BEARISH ON BIOTECH

By Daniel Kadlec

Dormant for years, the biotech bug is once again infesting stocks. This nasty man-made microbe, hatched in the labs of Wall Street, surfaces every few years to prey on susceptible (i.e., gullible) investors. Symptoms include feverish optimism followed by cold chills of reality.

The cyclical critter was due to hatch again anyway, but last week's revelation that Scottish scientists had succeeded in cloning a sheep amounted to a final whack at the snooze button. Now investors are wide awake to the potential wonders of biotechnology for the first time since a euphoric rally in those stocks in 1991. If you're a doctor or scientist, go ahead and take your best shot. Biotech certainly holds great promise, and you may well understand enough to pick the few stocks that will thrive. But overall the industry has been so consistently disappointing that laymen should stay away lest they get fleeced.

Consider that of the 300 or so publicly traded U.S. biotech firms, only about a dozen stirred up a profit last year. Many are one-drug research outfits in a field where only 1 in 10 drugs gets approved. In many cases, three or four one-note companies are working on the same basic treatment, like wound healing. It's a dicey business.

Recall the Flavr Savr, a tomato bioengineered to ripen on the vine and last months on the shelf. It might have been a huge moneymaker if only the thing had tasted like a tomato. Its maker, Calgene Inc., traded above $20 a share in 1992, but the stock subsequently rotted to $5, and Monsanto Co. has offered to buy the company for $7.25 a share.

That is by no means the most devastating loss stemming from a biotech failure in the '90s. Centocor Inc. fell from $60 to $5; Xoma Corp., from $32 to $1; Synergen Inc., from $73 to $4--all because of hyped septic-shock drugs that didn't work. Inject those babies into your 401(k), and you'll never retire. And these aren't isolated cases. Viren Mehta, a biotech expert at Mehta and Isaly, keeps track of biotech bombs. He says there have been 14 major disasters this decade. But even if you avoid specific product failures, it isn't enough. Biotech stocks fly in swarms. The whole group gets clipped when a few failures surface. In the three years that ended in December 1994, the average biotech stock fell 63%.

The average biotech stock has doubled in two years and reached a four-year high. Following the cloning news out of Scotland, investors indiscriminately bid up stocks of cloning companies. Shares of PPL Therapeutics of Edinburgh, which helped fund the sheep-cloning research, jumped 16% in a day. There have been some genuine commercial successes, such as Biogen Inc.'s drug Avonex, approved last year to treat multiple sclerosis. Still, a dangerous froth is forming. "During the next six months you're going to see quite a few disasters," predicts Evan Sturza of Sturza's Medical Investment Letter.

There are lots of reasons to root for these companies. High stock prices raise more money to seek important treatments. But after much exposure, I've been able to develop a resistance to the biotech bug. And until the gene-bending gods can separate the hype from the glory, they're not getting any of my savings.

Daniel Kadlec is TIME's Wall Street columnist. Reach him at [email protected]