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Spirit of Innovation Still Burns Bright in Biotech


By Michael King

While the wounds caused by the horrific events of September have just begun to heal, the biotechnology sector continues to flounder in the aftershock. A disaster of this magnitude is unprecedented in market history. Many have compared the current situation to the Gulf War period from late 1990 through early 1991. The differences are, of course, that the Gulf War happened “over there,” did not even come close in terms of the loss of life, and ended relatively quickly. The similarities, though, are significant in the sense that Iraq invaded Kuwait at a point in time when the American economy was slumping, corporate profits were weak, and stocks were under significant pressure.

Economically we remain bullish with the Federal Reserve cutting the discount rate and providing more than $80 billion in credit to the banks via the open market purchase of bonds. In addition, the two-year Treasury note recently closed at a yield of 2.90 percent (a level not seen since 1956) and individuals have received their $300 to $600 tax rebate checks.

To return to the subject of biotechnology, we believe that there are a number of factors that we can attribute to desirable investing in this sector, primarily the bargain buys in the biotech and genomics sector. Typically, we mark bottoms in this space with mean market-cap-to-cash ratios around the 4 to 5X level1. While we do not believe the entire biotech sector has bottomed, currently trading at a mean of 4.9X cash, we now see several compelling valuations for that are too cheap to ignore.

It should come as no surprise that genomics companies, having suffered the worst this year, top the list of those trading at or around cash with a genomics industry market-cap-to-cash ratio at 3X. Year to date, the genomics sector, down 57.7 percent, has underperformed the BTK (29 percent), S&P 500 (21.2 percent), Nasdaq Composite (39.3 percent) and Pharma Index (12.9 percent). Overall, out of 12 companies trading at less than 1X cash, 52 names trading in the 1.1 to 2X cash category, and 48 companies trading in the 2.1 to 3X cash category, almost half are genomics names.

In our too-cheap-to-ignore category, there are several genomics names trading at less than 3X cash, including some of our favorite names, such as Affymetrix trading at 2.5X cash, Gene Logic trading at 1.7X cash, Sequenom trading at 1.6X cash, Caliper at 1.2X cash and Orchid Biosciences trading at 1.2X cash.

We write this note with a heavy heart. We have all been deeply wounded by the senseless acts of September 11. The terrorists may have destroyed several buildings that are symbols of mankind’s desire to achieve greatness, but they did not break our spirit. And the spirit of innovation and the desire to conquer disease still burns brightly in the biotech industry. We remain quite bullish on the sector’s overall fundamentals and would view any weakness in the group as a tremendous buying opportunity for investors with an investment horizon that extends beyond the next few months.


1 Cash balances represent most recent reported figures including any proceeds from recent financings. Estimates priced at time article was written.

Robertson Stephens, which has not independently verified the information contained in this article, maintains a market in the shares of Affymetrix, Caliper Technologies, Gene Logic, Orchid Biosciences, and Sequenom and has been a managing or co-managing underwriter or has privately placed securities of each of these companies within the past three years.

Michael G. King, Jr., is a managing director and senior biotechnology analyst focusing on the genomics sector for Robertson Stephens.

Robertson Stephens research analyst Edward Tenthoff and research associate Ellen Lubman also contribute to Genomoney.


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