As the pioneering companies pursue divergent strategies, eventual winners should emerge.

by Dave Sterman

Like their Internet peers, genomics-based biotech stocks soared in the late 1990s. The much-hyped unraveling of the human DNA code lashed investors into a speculative frenzy, promising loads of lucrative new treatments for an array of ailments.

Fast forward to 2002. Genomics stocks are in tatters. Celera Genomics (CRA), for example, now trades for less than the value of cash on its balance sheet, implying that investors have put a negative value on its core business. Similarly, Human Genome Sciences (HGSI) and Myriad Genetics (MYGN) have traded down more than 70 percent in the last two years.

But analysts are quick to note that these companies have embarked upon distinct strategies that should lead to an eventual crop of winners and losers.

Celera Genomics

Analysts are generally underwhelmed by the prospects for Celera. The company, led by industry pioneer Craig Venter, quickly amassed a far-reaching database of the human gene map, which was finally completed in June 2000.

Celera had hoped that the data would be licensed by major pharmaceutical companies to aid in the drug-discovery process. After an initial spurt, licensing sales are now declining every quarter, as drug companies decide not to renew their contracts.

So Celera will have to go it alone and try to capitalize on its intellectual property by developing its own genomics-related drugs. And since the company got off to a relatively late start, it has yet to produce any drugs that appear to have real promise. "Until we see clear demonstration that Celera is succeeding at developing drug targets, we believe the stock will likely underperform the market," Think Equity Partners' Edward Tenthoff says.

UBS Warburg's Meirav Chovav concurs: "Given that Celera's research programs on protease inhibitors are early-stage, it is difficult for us to assess their clinical value."

After assessing Celera's potential revenue streams through 2007, Chovav sees shares rising from a recent $8.75 to just $11. In contrast, the analyst sees a great deal more value in shares of Human Genome and Myriad Genetics, with target prices 30 to 40 percent above current levels, based on a similar long-term analysis.

Human Genome Sciences

Even as Celera was touting the benefits of amassing DNA-related knowledge in the late 1990s, Human Genome was already looking to develop its own proprietary set of drugs that could eventually lead to strong product sales.

That head start has proved crucial, as the company has a host of drugs that are entering clinical trials. Its first two, Repifermin and Mirostipen, posted fairly weak results in late-stage clinical trials, but the company's drugs that are earlier in the testing process still appear to hold a great deal of promise, according to analysts.

Trying to forecast revenue growth for Human Genome is quite tricky, as it won't likely have drugs on the market for a few more years. Nevertheless, A.G. Edwards' Alex Hittle sees sales reaching $455 million by 2007.

"From our research, this level of revenues is viewed somewhat as an inflection point in this industry, whereas companies reaching this milestone achieve some level of stability in regard to earnings and share price," he says.

Hittle's "strong buy" rating is predicated on his discounted cash-flow model, which values shares at $36.

One reason analysts are willing to be patient with Human Genome is its flush balance sheet, which boasts $1.6 billion in cash. That's due to generous financing during the bubble years.

The company has allocated some of that stash to building a fairly extensive manufacturing facility. Management has concluded that profit margins can only achieve peak levels when drug production does not need to be outsourced.

Myriad Genetics

Myriad Genetics has found another way to bring in sales while it awaits development of its own DNA-related drugs: The company has developed a line of tests that can tell if someone is genetically predisposed to contract a particular disease.

The test kits are just now gaining popularity with physicians. Thomas Weisel's Patrick Mooney sees sales of Myriad's diagnostic products growing 45 percent in fiscal (June) 2003 to $39 million.

The company's understanding of the DNA map also appears to be helping it attract partnerships with large drug companies. "Myriad is one of the few companies in the group that has continued to win collaboration deals with large pharma and industrial partners," Mooney says.

Despite the relatively bright outlook, shares of Myriad have floundered, hitting a new three-year low in early September. Weisel's Mooney agrees with UBS Warburg's Chovav that shares appear undervalued, and sees them rising to $25 over the next six months.