INVESTOR’S LAB

Beware the biotech barker

Tom Jacobs

Biotech company executives’ public statements Step right up! the job for Celera. At the height of the frenzy, can tell you a lot, but even the most experienced All development-stage biotech bigwigs have Celera sold almost $1 billion in stock to large investors have trouble separating their spin to develop their barker skills, tirelessly and institutional investors. from fact. This is especially difficult because convincingly telling a better story to divert most biotechs are development-stage com- investor attention from other rides and attract When the carnival leaves town panies lacking profits, dependent for years on them to their own. But you and I must hear Today, the stock is around $10, down 96% from selling hope and dreams. Yet knowing the dif- their message warily. Company management its March 2000 peak, Venter has departed, and ference between story and substance is the only covets not us but institutional investors, the Celera’s genomic information business now way to determine whether you are investing or deep-pocketed buyers that can lay out the mil- belongs to sister company .

http://www.nature.com/naturebiotechnology speculating—gambling, really—and making lions or even billions to buy enough shares or Celera has become a drug maker with a pipe- money and avoiding losses. Management is debt to make a real difference. Compared with line but no products, along with a 50% share not necessarily to blame, but investors must them, you and I, so-called retail investors with of Celera Diagnostics (Alameda, CA, USA) and recognize the game. 10, 100 or 1,000 shares, are mere insects, yet we its products. hear the same pitch. Executive statements may The cash raised at the carnival’s peak pro- Filling the cookie jar come with legal disclaimers, but not “This is vided quite a lifeline. Even with this year’s The game for development-stage biotechs has for Wall Street, not John/Jane Q. Investor.” The expected $135 million to $150 million cash one invariable rule: like teenagers, they never responsibility for caution is ours. burn, Celera’s stash should last another five have enough cash. Once public, companies years. Many retail investors sport more serious desperate to fund a decade or more of lead Barker par excellence burns, because they did not take the profits the product research and development must raise Consider perhaps the greatest biotech barker carnival brought them. money through selling more of their shares in biotech history, former Celera and/or borrowing money (by selling their (Rockville, MD, and S. San Francisco, CA, USA; A rule of thumb for speculation 2005 Nature Publishing Group Group 2005 Nature Publishing

© debt, often with the provision of converting NYSE:CRA) president, J. . Thanks Thus, it’s key to know the difference between debt to shares; Nat. Biotechnol. 21, 855, 2003). to management at Applera (Norwalk, CT, investing and speculation, between the cold The greater the demand for shares, the higher USA), the parent of both Applied Biosystems hard nature of company numbers in a quar- the share price, the more money to be made by (Foster City, CA, USA; NYSE:ABI) and Celera, terly or annual filing, and a pied piper CEO. selling new shares. Venter in 1999 took the helm of Celera and also We should invest all or most of our money by But with no profits to form a sound financial the tide in the affairs of men—the incredible estimating what a profitable company is worth footing to a stock’s valuation, there is only hope public attention focused on sequencing the based on current product sales and profits and and dreams—air—to boost the stock price, so —at its flood. estimates of a reasonable future. the hotter the air, the better. Company execu- It was a perfect storm, a once-in-a-millen- We should only speculate, if at all, with tives perform a relentless round of public rela- nium combination of public attention and small amounts we can afford to lose, buying tions designed to garner attention. A wonderful investor interest in biotech. Venter was the but sparingly shares of unprofitable compa- story can vault a stock price to the heavens, consummate biotech barker, the rebellious, nies with promising stories. And when we do but even if a company’s stock is stuck in one larger-than-life wild genomist who blew apart speculate, we should be happy, and take any of the frequent cycles where investors desert the scientific establishment with his shotgun profits flighted to us, with the hot air. I make biotech in droves, the story can still snare will- method of gene sequencing. The hungry media it a general practice to consider selling half my ing lenders. And so for hopeful biotechs, noth- went nuts. The government’s program was shares of a speculation if and when the price ing is more important than the story and the wrong, slow and perhaps even harmful in its doubles from my purchase price. Then no storyteller. delay! Celera’s celerity would bring us all per- matter what happens, I’ve not lost anything, sonal DNA cards, individualized medicine and and—to use a gambling phrase—I’m playing investor riches! with the house’s money. Tom Jacobs is cofounder of Complete Growth The stock rose from $7.34 in June 1999 to a Let’s resolve to know the difference between Investor (http://www.completegrowth. high close of $247 on March 6, 2000, about 35 investing and speculating and to know that com). He welcomes your comments at times in less than nine months—an unparal- while executives of development-stage biotechs [email protected]. Tom owns no shares leled gestation period. Whatever the combina- may sing siren songs of biotech love, they aren’t of companies mentioned in this article. tion of company spin and media attention, it did for thee and me.

538 VOLUME 23 NUMBER 5 MAY 2005 NATURE