Biotechnology's Stock Market Blues
OCTOBER 19--"Black Monday' as it is called on Wall Street--sent shock waves throughout the economy and turned cocky stock market players into conservative investors. The impact on the American economy will not be fully understood for some time, but the effects of the market's nose dive on biotechnology companies are becoming evident.
Even before Black Monday, prices of most biotechnology stocks had declined substantially from the all-time highs reached earlier in the year. But in the 2 weeks spanning 12 October through 28 October, investors saw the stock values of 60 prominent, publicly traded biotechnology companies plunge 44% on average*--a far steeper decline than the overall 28% drop in the stock prices of the nation's 400 largest companies.
* PaineWebber, Inc.
This decline and the loss of investor confidence may profoundly affect the future of some of the country's 400 biotechnology companies. For the foreseeable future, analysts say public offerings and venture capital funds are no longer viable funding mechanisms for infant companies seeking to expand research and commercialize new products. As a result, companies that are lean on cash and still have several years to go before their products reach the market may be forced to shed some of their independence and align themselves with larger American or foreign companies. The impact will be mixed, however, since many biotechnology companies took advantage of the "bull' market in recent years to build up their cash reserves, which will provide some insulation.
Indeed, until mid-October, raising capital to start and run biotechnology ventures was not much of a problem, thanks to the glamour and economic potential of recombinant DNA technology. But it is clear that biotechnology stocks have now lost their luster. "Investors are just not interested in them now. They are interested in established quality companies with an earnings record, especially those that are recession resistant.' says Kathleen Behrens, vice president of research at Robertson, Colman & Stephens of San Francisco.
Linda Miller, a vice president with PaineWebber, believes that "investors' time horizons have shrunk.' They are not willing to invest for a long-term payoff because "they are very uncertain about the future.' This phenomenon extends to institutional investors as well as to the small investor, adds Behrens. Institutional investors have "lightened up on these stocks,' she says, because of worries about liquidity.
Liquidity concerns are partly reflected in the steep decline in biotechnology prices. An analysis assembled by PaineWebber shows that in the 2 weeks ending 27 October, Genentech fell 41%; Cetus slipped 43%; Amgen and Centocor were down 47%; and Chiron was off 57.4%. Since then Genentech has seen its price recover...