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Stock Analyst Update

Celera's Uncertain Future Makes Its Stock Risky

Sequencing the human genome is just the first step for biotech firm.

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PE Corp-Celera Genomics' (CRA) earnings announcement was a reminder that the company still has a ways to go to prove itself. It may become a leading biotechnology player, but given its high valuations and uncertain prospects, the stock is best left to very aggressive investors.

On Thursday, the genomics firm reported a net loss for its fiscal fourth quarter of $24.9 million or $0.43 per share--worse than consensus estimates of a $0.36 per-share loss.

But the fact that Celera is losing money isn't really surprising, or, frankly, all that concerning. Like many of its competitors, such as Human Genome Sciences (HGSI), Celera is in the startup phase of its development. And thanks to a wildly lucrative secondary offering in March, the company raised $820 million and thus has loads of cash to burn.

The primary problem for Celera is that its shares continue to trade more on hype than reality. Managment announced in June that it had completed a so-called "first assembly" (a mostly complete draft) of the entire human genetic code. It was the prospect of this scientific feat that helped drive Celera as high as $276 a share in the spring of 2000. It has fallen about 60% since then, but is still trading at about 175 times sales--making it one of the priciest names in the already pricey biotech arena. 

The stock's volatility is a reflection of the uncertainty Celera faces: Its assembly of the human genome isn't a path to automatic profits. Indeed, the company is probably several years away from earnings and is working in a fiercely competitive field with an untested business model.

And even though it added subscribers to its genome database during the past quarter and continues to expand its research efforts, Celera's current revenues are still quite limited. In fiscal 2000, sales totaled $42.7 million, and management speculated during the conference call that those sales could double during fiscal 2001. While revenue growth of 100% would be impressive, the company's shares appear to be priced for much faster growth than that.

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