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Stock Analyst Update

Little Substance to Sell-Off in Biotech Issues

Bad reaction in genome stocks slams rest of volatile biotech sector.

Mentioned:

Biotech stocks were tarred with the same brush as genome stocks Tuesday--many unfairly.

Biotechnology stocks, especially genomics firms, tumbled hard following a joint statement by President Clinton and British Prime Minister Tony Blair in which they urged corporations to distribute information about the human genome free of charge to scientists. They also reiterated that data collected by the U.S. government-sponsored Human Genome Project would be made available to researchers for free.

Investors dumped biotech stocks in response, especially PE-Celera Genomics (CRA), which plunged 22%. Celera is expected to complete a map of the human genome by the end of the year, well ahead of government researchers.

But the market dramatically overreacted to information that was hardly new.

Sure, when data from the Human Genome Project becomes publicly available, it could undercut Celera's potential profits, because it is trying to make money by selling such data to universities and drug-development companies. But the U.S. government has long planned to release the Human Genome Project's information free of charge. Clinton and Blair's announcement was simply an effort to bring the issue front and center.

Moreover, stocks of many drug-development companies such as Immunex (IMNX) were getting killed also--even though they don't operate under the same model as the genomics companies.

This is not to say stocks such as Immunex and Celera are good buys. Indeed, most biotech stocks are trading at sky-high multiples following a massive runup in 1999 and thus far in 2000.

But Tuesday's drop should remind investors of how difficult it can be to invest in the volatile biotechnology sector and why they should thoroughly research any biotech company they're interested in rather than buying--and selling--on hype.

 

Emily Hall does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.