Washington

Biotechnology stocks recovered slightly last week from their sharp drop in value the week before. Many analysts suggested that the earlier call by US President Bill Clinton and British Prime Minister Tony Blair for the open sharing of raw gene-sequence data (see Nature 404, 324–325; 2000 ) was merely the trigger for a massive sell-off of overvalued shares that was already poised to happen.

The analysts argued that the sector had become overvalued since December, when a stampede of apparently undiscriminating investors had poured money into biotechnology and genomics companies on the heels of a number of headline-grabbing announcements. These included the publication of the full sequence of chromosome 22 (see Nature 402, 447–448; 1999), and the news that Celera Genomics expects to finish sequencing the human genome this year.

Even if Clinton and Blair had not made their 14 March announcement, according to several analysts, some other event perceived as ‘bad news’ by investors would have prompted a similar sell-off soon. “The markets were looking for a reason to correct in biotech,” says Eric Schmidt, a molecular biologist who now works as senior biotechnology analyst with S. G. Cowen Securities, a New York-based company focused on technology and health-care research. “By any measure the valuations were stretched.”

“It was a speculative bubble,” adds Karen Johnson Grunst, a health-care stock analyst at Banc One Investment Advisors, a large unit-trust manager in Columbus, Ohio. “People were investing in these stocks who didn't understand the fundamental stories — and more importantly, didn't want to.”

Even though the Clinton–Blair joint statement emphasized the importance of patent protection for “gene-based inventions”, many investors, apparently confused by erroneous media reports alluding to an incipient ban on gene patents, fled “in a blind panic”, as one analyst put it.

By last Friday, the NASDAQ biotech index had fallen by 15 per cent since 14 March, registering a 30 per cent decrease since its post-December peak on 7 March. High-profile biotech shares have taken greater hits than the index as a whole, closing at strikingly lower values than those at which they opened on 14 March: Celera closed at $122.5, down 31 per cent; Human Genome Sciences closed at $97.81, down 37 per cent; Incyte closed at $107.38, down 46 per cent; Millennium Pharmaceuticals closed at $139.63, down 41 per cent; and Affymetrix closed at $155.75, down 35 per cent.

Further volatility and perhaps more falls in biotechnology shares are expected in the coming months. But analysts predict that solid companies should ultimately recover their lost ground. Indeed, many of the shares listed above increased in value between Monday and Friday last week; the NASDAQ index rose from its nadir of 1,087 on Monday to finish the week at 1,137.

William Haseltine, the chief executive officer of Human Genome Sciences in Rockville, Maryland, criticized the way the sell-off had taken place across the whole biotechnology sector. “Investors should look at the underlying companies, not the sector. I believe that if you look closely at our company, you will find a company worth investing in.”

Indeed, some analysts urged clients to buy into what they now feel are undervalued companies that remain excellent long-term bets. Michael King, an analyst at Robertson Stephens, a San Francisco-based brokerage house, upgraded his recommendations from ‘buy’ to ‘strong buy’ on stocks including Affymetrix and Millennium Pharmaceuticals. The sell-off “does nothing to diminish our enthusiasm for the genomics sector nor the transforming technology contained therein,” he says.

Some, however, are less bullish. Grunst, who co-manages $1.15 billion in unit-trust health-care holdings, urged her company to replace pharmaceutical shares with biotechs last autumn. But in January and February she retreated from what she thought was becoming an overvalued sector, cutting her biotech holdings by a third and getting out of companies such as Biogen and Chiron altogether. Grunst says that she is now putting her money on companies that form the ‘bricks and mortar’ infrastructure behind biotechnology, along with selected product-oriented companies.