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Stock Analyst Update

A Guide to Genomics Mania

Don't get carried away by the hype.

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In the next few weeks, Celera Genomics (CRA) is expected to announce that it has sequenced--in effect, transcribed--the entire human genetic code.

Make no mistake, this is a really big deal. Decoding the human genome is expected to be the first step in a new era of science and medicine. As biologist Eric Lander explained in a recent New Yorker article by Richard Preston, "Having the human genome is like having a Landsat map of the earth, compared to a world where the map tapers into the unknown and says 'There be dragons.'"

Investors need to remember one key point, however, when Celera makes its announcement: There is a difference between a scientific milestone and a business milestone, and Celera will be achieving the former more than the latter.

Celera will not generate immediate profits from its accomplishment. Indeed, most of the genomics companies, including Celera, Incyte Pharmaceuticals (INCY), and Millennium Pharmaceuticals (MLNM), have untested business models and are probably several years away from significant earnings.

To compound that problem, these stocks--especially Celera's--are incredibly expensive. People are investing in the dream of genomics rather than the reality of it.

Does that mean that you shouldn't invest in genomics names? Not necessarily. These companies, if they are able to establish a beachhead in the business of genetic information, could become some of the most important health-care firms of this century. As an analyst who covers Celera, I've been struggling for months now to decide whether I should invest my own money in the company. So far, I haven't bitten the bullet: I have a hard time buying something that frequently trades at more than 100 times sales.

And for every person who has made money from Celera's meteoric rise in recent months, there are a whole lot of others who got in near the top. There were plenty of investors who ponied up $225 a share for Celera's secondary offering, only to be left smarting after the stock plummeted. (The stock has since rebounded a bit and is now trading at about $97 a share.)

If you're going to invest in a genomics company or two, just remember that these are speculative investments. This may be a giant leap for mankind, but it's only the first step in Celera's trek toward profitability.

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