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TRENDSPOTTER: Why German Investors Lost Their Cool

THE GERMAN public welcomed the Neuer Markt, Germany’s Nasdaq equivalent, with open arms, driving the exchange steadily higher since its inception a few years ago. Until quite recently the Neuer Markt succeeded in attracting investors and, thus, helped to support start-up companies in new-economy sectors, from multimedia to the Internet and genomics.

But since last fall the something has started to go wrong. The euphoric mood has rapidly turned downtrodden and now borders on depressed.

For example, EMTV, which was a market darling, has fallen into total disgrace and about a billion euros in market capitalization in just a couple of months. Internet service provider Letsbuyit.com is now struggling to survive after a steep decline down to almost zero.

So the question is, why did the Germans, who are well known for being rational, suddenly abandon the market, sending it into a freefall?

I believe there are four major reasons that account for this dizzying downward spiral.

·         Today’s extremely complex world drives people to look for simple rules to follow, which often result in black and white thinking and a totally irrational investment strategy. Since they don’t understand what most of the companies that trade on the Neuer Markt are doing, investors tend to be short sighted and overly reliant on trends. The mass media further reinforces these sentiments by creating and reinforcing these ideas.

·         People tend to go to extremes. When we get hooked on a trend we tend to take it to the nth degree. One week everybody is buying genomics, Internet, and/or multimedia stocks, the next week some new reality sets in and everybody is selling. 

·         Suddenly investors are looking for today’s profits rather than future growth expectations. While internet service providers may have an easier time achieving profitability in the near term, this way of thinking hurts genomics stocks. Genomic drug-discovery companies and biotechs have to invest heavily in research an development for years before launching or licensing a product that can contribute to meaningful profits.

·         Due to smaller trading volumes, stocks on the Neuer Markt tend to get hit more severely by the general downward movement in the global stock markets.

In light of these trends it is important to remember that the biotech industry is by no means a short-term investment but a long-term one.

There is a lot of potential in the biotech industry, particularly for investors who hold on to stocks for 5 to 7 years, invest in select companies, and make informed decisions based on an understanding of a company’s technology as well as its business objectives.

And, when it comes to investing in the genomics and biotech sectors, patience is also a virtue. Such companies need as much time as big pharma to launch their promising new drugs.

But, rest assured, although there are only a small number of interesting industry sectors with rapid growth potential and high profitability, biotech is certainly among them.

Gunnar Weikert is the CEO of Inventage, a Dusseldorf-based venture capital fund. Until recently he was global head of physiomics at Bayer, where he negotiated blockbuster deals with Millennium, Lion Bioscience, and CuraGen. He holds an M.D. and Ph.D. in diabetes research. You can e-mail him at [email protected]

TrendSpotter is a weekly column that focuses on how trends in politics, patent law, and the US and European markets affect the genomics industry. The column appears every Friday. Next week Rochelle K. Seide, a lawyer and IP specialist with Baker Botts, will offer the second part of her introduction to patent law.

To access previous columns just enter the word "Trendspotter" in the archive search window on the homepage.

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