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Beware the biotech barker


Biotech company executives' public statements can tell you a lot, but even the most experienced investors have trouble separating their spin from fact. This is especially difficult because most biotechs are development-stage companies lacking profits, dependent for years on selling hope and dreams. Yet knowing the difference between story and substance is the only way to determine whether you are investing or speculating—gambling, really—and making money and avoiding losses. Management is not necessarily to blame, but investors must recognize the game.

Filling the cookie jar

The game for development-stage biotechs has one invariable rule: like teenagers, they never have enough cash. Once public, companies desperate to fund a decade or more of lead product research and development must raise money through selling more of their shares and/or borrowing money (by selling their debt, often with the provision of converting debt to shares; Nat. Biotechnol. 21, 855, 2003). The greater the demand for shares, the higher the share price, the more money to be made by selling new shares.

But with no profits to form a sound financial footing to a stock's valuation, there is only hope and dreams—air—to boost the stock price, so the hotter the air, the better. Company executives perform a relentless round of public relations designed to garner attention. A wonderful story can vault a stock price to the heavens, but even if a company's stock is stuck in one of the frequent cycles where investors desert biotech in droves, the story can still snare willing lenders. And so for hopeful biotechs, nothing is more important than the story and the storyteller.

Step right up!

All development-stage biotech bigwigs have to develop their barker skills, tirelessly and convincingly telling a better story to divert investor attention from other rides and attract them to their own. But you and I must hear their message warily. Company management covets not us but institutional investors, the deep-pocketed buyers that can lay out the millions or even billions to buy enough shares or debt to make a real difference. Compared with them, you and I, so-called retail investors with 10, 100 or 1,000 shares, are mere insects, yet we hear the same pitch. Executive statements may come with legal disclaimers, but not “This is for Wall Street, not John/Jane Q. Investor.” The responsibility for caution is ours.

Barker par excellence

Consider perhaps the greatest biotech barker in biotech history, former Celera Genomics (Rockville, MD, and S. San Francisco, CA, USA; NYSE:CRA) president, J. Craig Venter. Thanks to management at Applera (Norwalk, CT, USA), the parent of both Applied Biosystems (Foster City, CA, USA; NYSE:ABI) and Celera, Venter in 1999 took the helm of Celera and also the tide in the affairs of men—the incredible public attention focused on sequencing the human genome—at its flood.

It was a perfect storm, a once-in-a-millennium combination of public attention and investor interest in biotech. Venter was the consummate biotech barker, the rebellious, larger-than-life wild genomist who blew apart the scientific establishment with his shotgun method of gene sequencing. The hungry media went nuts. The government's program was wrong, slow and perhaps even harmful in its delay! Celera's celerity would bring us all personal DNA cards, individualized medicine and investor riches!

The stock rose from $7.34 in June 1999 to a high close of $247 on March 6, 2000, about 35 times in less than nine months—an unparalleled gestation period. Whatever the combination of company spin and media attention, it did the job for Celera. At the height of the frenzy, Celera sold almost $1 billion in stock to large institutional investors.

When the carnival leaves town

Today, the stock is around $10, down 96% from its March 2000 peak, Venter has departed, and Celera's genomic information business now belongs to sister company Applied Biosystems. Celera has become a drug maker with a pipeline but no products, along with a 50% share of Celera Diagnostics (Alameda, CA, USA) and its products.

The cash raised at the carnival's peak provided quite a lifeline. Even with this year's expected $135 million to $150 million cash burn, Celera's stash should last another five years. Many retail investors sport more serious burns, because they did not take the profits the carnival brought them.

A rule of thumb for speculation

Thus, it's key to know the difference between investing and speculation, between the cold hard nature of company numbers in a quarterly or annual filing, and a pied piper CEO. We should invest all or most of our money by estimating what a profitable company is worth based on current product sales and profits and estimates of a reasonable future.

We should only speculate, if at all, with small amounts we can afford to lose, buying but sparingly shares of unprofitable companies with promising stories. And when we do speculate, we should be happy, and take any profits flighted to us, with the hot air. I make it a general practice to consider selling half my shares of a speculation if and when the price doubles from my purchase price. Then no matter what happens, I've not lost anything, and—to use a gambling phrase—I'm playing with the house's money.

Let's resolve to know the difference between investing and speculating and to know that while executives of development-stage biotechs may sing siren songs of biotech love, they aren't for thee and me.

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