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Downward Spiral?


Analysts. Can’t live with ’em, can’t profit without them — or at least that’s one view that some industry watchers in genomics have been airing recently. Analyst coverage, they argue, contributes to a vicious cycle that looks like this:

Relatively unknown industry outperforms, attracts a number of analysts. Industry rockets; more analysts join the fray. Suddenly, industry tanks — big time (have you guessed we’re talking about genomics?). Analysts flee the scene. Even if industry rights itself and starts performing again, investors are nowhere to be found without analyst coverage of that sector. Sans coverage, even good companies continue to founder, and the sector never recovers.

Certainly, analysts covering the genomics industry are fewer than they used to be. Of the five biggest companies on the GTI (by market cap), all are down from their peak coverage, mostly in late ’01. Of our six smallest firms from earlier last year, three have been acquired, one has merged, one has lost coverage altogether, and the last one, Lynx Therapeutics, is down to one analyst (from a high of just two) and has given some faint indications that a merger or acquisition could be in the offing.

But it’s not as cut and dried as it looks, contends William Blair analyst Winton Gibbons. For one thing, blaming the current genomics slump on lack of analyst coverage ignores a crucial fact: that Wall Street has seen severe layoffs. Gibbons’ own firm is down to some 25 analysts from 40. “It’s not just genomics that has lost analysts,” he says.

And as for the cycle theory, Gibbons looks at it as a fallacy. “In the end, good companies go up and bad companies go down with or without analysts,” he says. Analysts merely accelerate those ups and downs for an already in-the-works cycle — they don’t change the results, he argues. For genomics companies, which are “burning through cash and not hitting their milestones,” Gibbons says bluntly, “they could have 20 people covering them, and they’d still be worth what they’re worth.” Peanuts, anyone?


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