Take the shotgun approach if you buy genome stocks, Jeffrey Rubin says.
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Date accessed: 5 July 2000
JEFFREY RUBIN
Saturday, July 1, 2000
The similarities are compelling. Born in academia, nurtured by
government funding, and now seemingly hijacked by entrepreneurs. In
so many respects, the mapping of the human genome, and its potential
medical applications, resemble the state of the Internet only five or six
years ago.
And just as the Internet made its jump from academia to a slate of
initial public offerings, so too is the genome taking a leap from the
laboratory to the stock market.
Within this rubric, there are really three types of firms. Most notable
are the gene mappers, like Celera Genomics Inc., who are racing to
complete the map and then sell it to pharmaceutical companies. The
latter, like Millennium Pharmaceuticals Inc., in turn hope to use this
mapping information to develop products than can re-engineer genes,
and hence provide cures or at least treatments for
genetically-determined diseases.
Lastly, there are equipment manufacturers such as PE Biosystems
Group that provide the sequencing decoders to gene mappers, and are
the only group with earnings.
Over the past decade, the frontiers of genetic engineering have
exploded on the back of advances in computing capacity and
molecular biology. Not only has computer technology advanced to the
point where a cataloging of the more than one billion words of our
genetic language has become possible, but also the development of
retrovirus technology has for the first time provided an actual
mechanism for effecting gene therapy.
Essentially, gene therapy entails loading a good gene on to a virus.
Once the retrovirus penetrates the patient's cell, it replicates its genetic
information, effectively inserting the desired gene into the patient's
chromosomes. Less ambitious, but more immediate, is the prospect of
designer pharmaceuticals that are tailor-made to a patient's genetic
makeup so as to enhance therapeutic effectiveness.
A mature technology would allow health practitioners to scan your
genetic makeup and identify your genetic disposition to disease. If, for
example, you are identified with a gene linked to the incidence of breast
cancer, genetic engineering could potentially take that gene out and
replace it with a gene that triggers tumour suppression.
Although gene therapy is still in its infancy, its economic potential
exceeds that of the so-called Internet economy. Even broadly defined,
the information economy is at about 8 per cent of U.S. GDP.
E-commerce represented less than 1 per cent of U.S. retail sales last
Christmas. By comparison, the health economy, at 14 per cent of
GDP, is almost twice the size of the information economy.
And given the demographic profile of North America over the next 20
years, that share is likely to grow. Yet information economy stocks
listed on the Nasdaq Stock Market have 14 times the capitalization of
Nasdaq biotech stocks.
If genomics becomes the market's new technological paradigm, are
there lessons to be gleaned from the Internet experience?
If there is one lesson, it's that picking individual winners in a period of
explosive technological change is needlessly risky.
Sure picking Yahoo Inc. or Amazon.com Inc. would have yielded
phenomenal returns, but it wasn't so apparent back when they were
launched that those stocks were qualitatively better than a whole host
of other Internet IPOs.
If instead, one would have bought an equally-weighted basket of the
28 largest Internet IPOs between late 1994 and mid-1997, one
wouldn't have to make an all or nothing bet. An equally weighted
basket of these stocks would yield a 1,400-per-cent return to date.
That would have beaten the individual performance of 23 of the 28
individual companies, over 80 per cent of the stocks held in the basket.
Moreover, the index's return would be more than five times the median
return from the 28 IPOs. While the index's return would still pale
beside the 14,000-per-cent return from Yahoo or the 12,400-per-cent
return from America Online Inc., it's all a whole lot better than the
negative returns from Peapod Inc., or other Internet duds in your
basket.
If there was a case for a shotgun approach to investing, genome stocks
are it.
Jeffrey Rubin is chief economist and managing director of CIBC
World Markets.
Categories: 16. Economics and Biotechnology, 32. Genome Project and Genomics