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Stock Analyst Update

Waiting for the Genome

A guide to genomics mania.

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On Monday, the Clinton administration is expected to announce that the government-sponsored Human Genome Project has completed a rough draft of the human genetic code.

It is not immediately clear whether representatives from PE Corp - Celera Genomics (CRA) will be participating in the announcement. Celera has been in a much-publicized and sometimes-cantankerous race with the Human Genome Project to complete the mapping of the human genome.

Regardless of whether Celera is in attendance or not, it is expected to finish its working draft no later than the end of June. And most biotechnology investors are wondering if it's time to jump on the genomics bandwagon.

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, in light of Monday's expected announcement: There is a difference between a scientific milestone and a business milestone, and mapping the human genome is more the former than the latter.

Genomics companies will probably not generate much immediate profit from the mapping. Indeed, most of the firms, including Celera, Incyte Genomics (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 should avoid all 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 a stock 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 $125 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 genomics' firms 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.