Generic engineering lures investors with patience

Since 1961, scientists at Collaborative Research Inc. in Waltham, Mass., have been toiling away quietly in their biotechnology labs, turning out experiments in genetic engineering, molecular biology, and working on new industrial and agricultural products.

Like many firms deeply involved in genetic engineering, Collaborative Research is privately held.So it has received little public attention. By contrast, another genetic research company, Genentech, caused an enormous splash in the investment community when its stock was first was first sold to the public 10 months ago. Its share price soared from $35 to almost $90 the first day it was issued. Since then it has fallen to about $32.

But this week, CR seems on its way to the Big Time. Dow Chemical Company, the giant Midland, Michigan-based company, has put down $5 million to acquire a 5 percent share of the Massachusetts firm. The investment, CR founder and president Orrie M. Friedman was quoted as saying, meant his company could advance from being a strictly research-oriented company to making some money by selling the fruits of its laboratory developments.

Dow's stake in CR may be a much bigger investment than most individuals can think about. But it is not too different from what a number of people are doing these days: putting long-term investment money on the rapidly-evolving field of genetic engineering.

As these companies develop new products to increase crop yields, boost the recovery of oil exploration, help ferment alcohol into gasahol, and clean up oil spills, some investment advisers are recommending specific firms to their clients.

For instance, Thomas Weinberger, vice-president at L. F. Rothschild, Unterberg, Towbin, recently completed a report on the Cetus Corporation, a biotechnology firm for which Rothschild has acted as an underwriter.

"These companies are very suitable for certain types of investors," Weinberger says. "However, they are not meant for short-term gains." This helps explain, he says, why analysts are not concerned about Genentech's dramatic drop in price after its even more dramatic rise last year. With almost no history of investment in this industry to go on, he says, the company and its investment banker underestimated the number of shares that it would have been most profitable to issue and miscalculated the initial offering price.

Biotechnology issues, he adds, "are not widows and orphans stocks. But for the technical and risk-oriented part of a portfolio, they are a logical choice."

"Generally, the outlook for these companies continues to be quite good," agrees Bankers Trust analyst Clark Green. However, he adds, "investment opportunities are still very limited," because much of the research is going on at the larger firms like Allied Chemical, Monsanto, Standard Oil of California, Koppers, and Dupont, or in firms that are owned by larger companies.

But where investment is available, Green adds, "there is great potential there. . . . In fact, right now it's all potential."

So far, of course, there has been much controversy about the potential dangers of genetic research, a fact Weinberger acknowledges could be harmful to biotechnology stocks.

"With everything that's going on, somewhere along the line, there's going to be an accident," he says. "It probably won't be big or very bad, but over the next 20 years, there will be thousands of people working in genetic engineering." Eventually, he says, somebody will make a mistake. That somebody probably will not be working at one of the established companies that have built complicated security arrangements for keeping bacteria in the labs, he adds, but "some dumb graduate student working in his basement or in the college lab on the sly."

When this happens, Weinberger says, there is bound to be new controversy about the safety and ethics of genetic engineering, which will affect earnings of the legitimate companies, though only temporarily.

There is too much promise in the work these companies are doing to keep them down for long, he believes. Tiny "bugs" that consider oil a delicacy and gobble up oil spills, for instance, will be welcome by oil producers and transporters as well as environmentalists. And a soybean plant that could feed itself on nitrogen in the air would save a lot of nitrogen fertilizer.

While much of the short-term benefit of biotechnology research will be in the health-care field, Weinberger says, the greatest long-term gains will come in of agriculture, energy, and anti-pollution advancements.

The commercial application -- and economic return -- of genetic engineering is noted in Weinberger's report on Cetus. Only about 30 percent of the company's spending is for self-funded research into new products, he says, while 70 percent is devoted to product or process development for clients or partners. The major benefits from this commercialization effort, he continues, will be seen in the mid-1980s.

In general, there are two ways for investors to "play the field" of biology research, Weinberger says. One would be to invest in the larger companies where this research is only a part of their activity; or to go with the "pure plays" like Genentech or Cetus. "No one knows which way is best," he acknowledges.

One advantage to investing in genetic engineering, he concludes, is that, for now, at least, "it is American-based and controlled." This situation may not last for long, however, as Japan is "pouring" money into university and private research. European governments, including Britain and France have founded government-financed companies. Almost all US research has been privately financed.