Biotech rises: a boom - or a bubble?

Spurred by a dazzling array of new healthcare products, plus the mapping of the human genome, the US biotechnology industry is booming.

Many biotech companies, such as Genentech, Amgen, and Biogen, are increasingly becoming household names. Stock prices have soared, and investors are scrambling to get on board.

And yet, for all this success, some red flags are appearing: Despite skyrocketing stock prices, many biotech companies show little in the way of profit. Revenues are thin at many firms.

Moreover, some investment analysts fret that we could see a repeat of what happened to the industry back in the 1990s, when the sector boomed early, only to bust by the mid-90s.

Just last week, biotech stocks took an unexpected hit after reports emerged that the US was planning to restrict patents on genes. Such a move would likely put the brakes on several biotech companies' plans to pursue gene-based inventions.

The reports, however, turned out to be false. Yet the market's reaction to them underscores the volatility of this sector.

"If you want to take a lot of risk, you can buy into the sector," says Sheldon Jacobs, editor of the No-Load Fund Investor, a newsletter published in Irvington-On-Hudson, N.Y. "We're in a bubble," he says, referring to the soaring values of many technology firms, including biotech. "At some point, it's going to end."

Still, there's no denying how well the sector has performed lately. For the first two months of this year, health/biotechnology stocks soared 29.5 percent, according to financial information firm, Wiesenberger/Thomson Financial. The sector was followed by the technology/communications sector, which came in at 22.2 percent. By contrast, US domestic growth stocks rose 8.9 percent, while the S&P 500 index was down -6.9 percent.

Biotech mutual funds, which tend to be narrowly focused, have posted even more-impressive numbers. Chicago-based financial information firm Morningstar Inc. tracks six funds that carry only biotech stocks. Many healthcare funds also carry biotech stocks, but they are classified differently.

The six biotech funds (offered by Dresdner RCM, Fidelity, The Franklin Group, Monterey Mutual Funds, Orbitex Funds, and Rydex) are up an average of 76 percent for the year through March 10. For the one-year period through March 10, the group (excluding one of the funds, which was not created until late 1999) was up an astounding 200 percent.

So, should the average investor rush out and buy into biotechnology?

Hold your horses! says Emily Hall, who tracks biotech funds for Morningstar. Besides being notoriously volatile, she says, "a lot of [biotech] companies don't have earnings, and a lot of them don't even have revenues."

Moreover, some people are uncomfortable investing in biotechnology firms because of their links to controversial medical and research projects such as cloning and gene-altering techniques. Some firms also share links with the US pharmaceutical industry, whose stocks have struggled in recent months.

Biotech is probably one of the most complex sectors in the universe of stock and bond investing, experts say, in part because a conscientious investor has to often sort through what every company is engaged in when buying into a biotech mutual fund.

If investors really want to dive into biotech, Ms. Hall suggests they invest through dollar-cost-averaging, which entails investing regular amounts on a periodic basis, such as monthly, to avoid market highs and lows.

Hall also recommends buying into no more than one biotech fund. (She likes the Fidelity Select Biotechnology Fund and Rydex Biotechnology Fund.) And she would limit total biotech holdings to no more than 5 percent of one's entire portfolio.

Before forging ahead, Hall says investors should review any growth, or aggressive-growth funds they already own. They might already hold a major position in biotech, she says.

Case in point: According to analysis by Value Line, a financial services firm in New York, one of the reasons for the roaring success of the Fidelity Growth Company Fund has been its investment in such biotech firms as Genentech, MedImmune, PE Corp., and Celera Genomics.

Another Fidelity fund with a big biotech commitment is the Fidelity Retirement Growth Fund, which has recently held positions in such firms as Immunex, Amgen, Biogen, and MedImmune, according to Value Line.

For those who want to learn more about biotech investing, the industry maintains a Web site (www.bio.org).

(c) Copyright 2000. The Christian Science Publishing Society