How biotech fits into growth funds By Karen Bernstein

Growth fund managers haven't dampened their long-term enthusiasm for biotechnology stocks, retaining their belief that the sector ultimately will fit the growth stock model of double-digit annual earnings growth. But in the near term, most are only nibbling at stocks if they are buying at all, and they have little appetite for new offerings.

Biotech shares are competing for space in growth fund portfolios with stocks that are making money: software companies such as Microsoft and Novell; hardware companies such as Intel, Dell Computer and Motorola; consumer goods companies like Coca-Cola and Gillette; retailers like Wal-Mart and Home Depot; insurance companies such as American International Group; and pharmaceutical companies such as Merck, Glaxo and Pfizer.

Who's making money?

When biotech stocks are out of favor, the contrast between the stage of development at which they typically go public compared to companies in other sectors is intensified. "All the companies our high-tech analyst owns are making money," said William Chester of Denver Investment Advisors. "They're making money before they go public. I don't know that our high-tech analyst has ever bought a high-tech company on its prospects."

Typical growth stocks have earnings growth of 20 percent to 25 percent on a three-year horizon, according to Cam Philpott of Montgomery Asset Management, who likes to buy stocks where the forward price/earnings multiple is one-half to two-thirds of its growth rate.

Biotechs aren't taking up much room in many growth portfolios at the moment. They make up about one-half percent of Chester's diversified medium-cap growth fund. Chester started getting out of biotech in early 1992. His largest holding now is CellPro, and he also has positions in Liposome Technology and North American Vaccine.

Pay less today

"I'm in a wait-and-see mode," said Chester, who got burned on Synergen. "We don't have to own them because we run a diversified fund. We still think of them as growth stocks, but the discount rate has gone up significantly. We've increased our risk factor and we're willing to pay less today than two years ago. We have less confidence in our ability to predict the outcome for any individual stock.

"Earnings are important, so we've got a renewed emphasis on Tier 1 companies, though I don't own any right now - because of disappointments that have occurred and maybe some of these stocks are a little bit ahead of