Back to fundamentals

Last year was the year investors discovered genomics. Retail and momentum investors fell in love with the group, dragging along dedicated, fundamental biotech investors who may have known toolkit companies were overvalued, but also knew they had to play in the field to keep their investors happy.

But if biotech stock performance was bifurcated in 2000, with the toolkit group out-performing the product group, results are likely to be reversed this year, with product companies out-performing the tool plays. The news flow should be particularly good for product companies in the second half, while tool companies must prove they can do enough deals to justify their valuations.

Sideways market

The overall economy will provide a significant amount of noise.

"It seems to me it's going to take awhile to see where the economy settles out," said Jeffrey Casdin of Cooper Hill Partners. "There are two possible scenarios. If there's a soft landing - if Greenspan works another miracle - money will probably go into the stocks that have been beaten down. This is strictly technical. But if the economy slides, multiples will continue to come down. These are the two extremes. Chances are it's going to be closer to the soft landing scenario, in which case multiples will normalize and then fundamentals take it on a ride again - but not before the second half of this year or 2002."

Anders Hove of Bellevue Research expects that as growth in the S&P 500 companies is slowing to 8-9 percent from double-digit growth, there are likely to be more earnings warnings in the first half of 2001, as there were in the last half of 2000. Thus he sees the market downturn continuing.

The result for biotech will be that "the fundamentals will be in tension with the lower multiples of the rest of the market," Casdin said. "The fundamentals in biotech have never been stronger, and they're not going to get weaker. I don't see anything stopping that for a long time. But to me the bellwether stock is Genentech. It's selling at over 100 times earnings, whereas the market as a whole is suffering a compression of price/earnings ratios. Genentech deserves to sell at 60 times earnings, but that's still a 40 percent cut."

Kris Jenner of T. Rowe Price believes that the NASDAQ downturn is in the middle or late stages. "If

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