Biotech offers healing to queasy tech losers

The sickening plunge in the Nasdaq since September has left investors feeling queasy at the mere mention of technology stocks. So probably even less appetising in the prevailing downdraft is biotechnology. But investors should take a longer-term view of what is one of the world's most volatile and least understood asset classes, said Wayne Thornbrough, the managing director of Global Growth Equities for UBS Asset Management. 'We have got science working with us and we have got years of exciting developments coming along,' he said. 'I think we are in the early innings. We should buy something in this area and put it away and not worry about it or try to trade it.' UBS Asset Management has one of the world's biggest funds in the sector, the UBS (Lux) Equity Fund - Biotech, which weighs in at US$1.7 billion and has Mr Thornbrough at the helm. The fund is up 51.1 per cent for the year to August 31, according to UBS, and was up 58.3 per cent in calendar 1999. While pharmaceutical companies produce medicines from chemicals, biotechnology firms produce their drugs from natural materials made by the body such as proteins and enzymes. Biotech firms also seek to use knowledge about genes to come up with solutions to medical problems. New York-based Mr Thornbrough found a great deal of investor interest in biotech during a visit to Asia last month. '[But] the question that came up surprised me. It is: how is biotech different in the Internet era? On the surface there are some things in common but underneath that there are some very important differences,' he said. Many of the biotech companies are similar to Internet firms in that they are small and new and are not making money. 'They go up and down a lot on a daily basis just like Internet stocks,' said Mr Thornbrough. But he believes investors have cottoned on to an important difference between biotech and Internet. Biotech is not all hype. 'The biotech industry has a business model which is very tried and true, whereas the Internet industry does not. There are many biotech companies which have emerged over the years not only into profitability but into exceptionally good profitability,' he said. That is also one of the key differences between now and 1990-91 when biotech firms had a brief period of stardom before dropping off the investment map. One of the survivors of that era, Amgen, has gone respectable. It not only has a price-earnings (PE) ratio now, but the number is less than three digits, or 57 to be precise. Amgen expected to have profit growth 'in excess of 25 per cent for the next several years', said Mr Thornbrough. The PE does not look too high against traditional drug companies that typically have profit growth of 15 to 16 per cent but trade on PEs in the mid 30s. 'When we had this craze first [in 1990-91] we didn't have Amgen or any companies that were profitable. We have now got 20 something that are profitable. The probability of coming to market with successful products has gone up,' said Mr Thornbrough. Amgen's earnings are coming from a drug that helps keep the white blood cell count up during chemotherapy in cancer patients. But with most biotech companies you are largely paying for 'what's in the pipeline'. In Amgen's case, it is a drug that might cure asthma and one that should really capture attention, a formula to control fat production and obesity. Amgen made up 4.7 per cent of the fund at the end of August, one of its top holdings. Additional names in the fund are Idec Pharmaceutical and Genentech, which have a joint venture to develop an antibody called Rituxan. For some types of lymph cancer this drug can increase the chances of chemotherapy succeeding from 40 per cent to 100 per cent. Some investors might have second thoughts about putting their money in a company that makes money from cancer patients. But for Mr Thornbrough there are no moral conflicts. 'The way I look at it is with the example of Rituxan,' he said. 'Before, 60 per cent of the people went through a lot of pain and misery for no good purpose. Now they know they are going to be cured. I think that is an incredible gain.' Of course the biggest area of contention in the biotech world has been the mapping of the human genome. The private company Celera, headed by the controversial scientist Craig Vetter, managed to complete the task in nine months earlier this year, leaving a government team, which had been working on it for years, trailing in its wake. The breakthrough came just as the Microsoft antitrust trial was coming to a conclusion. Images were conjured up of firms such as Celera taking a similar firm grip on human genes as Microsoft had established on PCs. That led to United States President Bill Clinton and British Prime Minister Tony Blair to declare that some biotech work, such as Celera's, would have to be made public, sending the sector into a tailspin. 'A lot of investors misinterpreted that and believed there would not be the kind of profitability going forward that they anticipated. Nothing could be further from the truth. There are all kinds of scientific things in the public domain. It is what you do with it that matters,' said Mr Thornbrough. Figuring out which biotech companies will become profitable is a tough task for any fund manager, even one with Mr Thornbrough's 32 years in the business. He leans on fellow UBS fund manager Liana Moussatos, who has a PhD from Yale University and 16 years research experience at the US National Cancer Institute, to sort the wheat from the chaff. Above all, while biotech is an interesting asset class to play, it is one best left to the professionals because of the difficulties in finding the winners. Graphic: meet15gwz