And their predominance in the latter half of 2003 helped the Nasdaq Comp rise by 50% last year. The biotechnology stocks performed remarkably well in 2003, also, as evidenced by the Amex Biotech Index, which gained 45% in value between December 31, 2002 and December 31, 2003.

Moreover, December 2003 was a very good month for the biotech sector, which outperformed the market: The Amex Biotech Index added 6% between November 28, 2003 and December 31, 2003, while the Comp increased by 2% during the same time period.

Footnotes to the table:


§ Technology value: Market cap - cash (and cash equivalents)

§ LT debt plus convert.: Long-term debt plus convertible debt

§ Estimated burn rate: Net loss from the last available quarterly report, X4. Companies with net profit (instead of loss) are indicated as "na."

§ Survival index: Cash (plus cash equivalents) / Estimated burn rate.

§ Equity multiple: Market cap / (common stock + preferred stock + additional paid-in capital).

§ Median: Middle value in a set of values

§ The information contained in the December 2003 Stock Report has been obtained from public sources. Where information is not available, it is indicated as "na." Recombinant Capital cannot warrant the ultimate accuracy of the data. All data are subject to change.

§ Most of the accounting figures are from quarterly reports as of 9/03, with pro forma adjustments for more recent financings (including debt offerings).


Highlights From The December 2003 Stock Report:


§ Market caps have improved significantly over the last 12-month period. At the end of December 2002, the average market cap for the companies in our universe was $776 million and the median was $103 million. One year later, the average market cap had risen by 51% to $1,171 million and the median market cap for the entire group had gained 157% to $265 million.

§ As another indication that the biotech sector is recovering, less than 3% (7/245) of the stocks were trading below cash at the end of December 2003. Conversely, at the end of December 2002, 23% (54/233) of the companies in our universe had negative technology values.

§ The grand average survival index is still less than 3 years, and 60 companies have less than a year’s worth of cash in the bank. With the rush of new financings in the second half of 2003, however, the current survival index should improve.

§ By category, the top performers in terms of stock performance are Cancer and Genomic Supply, which gained an average of 156% and 149%, respectively, over the last year. Other groups that exhibited significant gains were Cardiovascular, Genomic Targets and Screening, with average gains of 137%, 136% and 136%, respectively. In contrast, the stocks of the 6 companies that comprise the Revenue-Driven group gained 60%, on average, between December 26, 2002 and December 31, 2003.

§ On average, the 245 stocks in our group were trading at 76% of their 52-week highs on December 31, 2003. 63 of those stocks traded above 90% of their 52-week highs. In this regard, the stocks in the Revenue-Driven group performed the best, ending the year at 89%, on average, of their 52-week highs. Other groups that bested the grand average were CRO/Service/Supply (87%) and Screening (84%).

§ Thus, the overall picture looks pretty rosy. However, these figures are subject to “survivorship bias”: Between December 2002 and December 2003, we removed 28 companies from our group – due to bankruptcies, delistings or acquisitions. Similarly, we dropped 23 companies in the preceding 12-month period (December 2001 – December 2002). And, since our first Stock Report in February 2000, we have taken a total of 93 companies off the list, to be replaced by new ones. Perhaps the term “going concern” has a different meaning for the biotech industry.

§ Of the 28 companies taken off our list in 2003, 18 were acquired or merged, 7 moved to the OTC Bulletin Board and 2 went bankrupt. Of the 18 companies that were acquired, 9 were acquired at a premium (the price per share at which each was acquired was higher than its year-ago price). The others were sold at a discount.

§ We also compared the acquisition price of these companies to their IPO prices. Consistent with historical patterns, a few companies turned out to be spectacular investments: Dianon Systems Inc. was acquired by Laboratory Corporation of America Holdings in January 2003 for $47.50 per share, a handsome premium to the firm’s IPO price of $8 per share. And Scios Inc. was acquired by Johnson & Johnson in April 2003 for $45 per share, well above its IPO price of $12 per share. More than half of the acquisitions (10/18), however, represented negative returns on IPO investments ([acquisition price – IPO price]/IPO price).

§ We remain optimistic about the long-term prospects for the biotech industry. Investors, however, who often have a shorter time-line, may do well to look at the sector’s historical record. The best advice is to diversify – it’s just not possible to pick out the one company that will become the next Amgen. However, if you have one good investment, it will end up paying for 4 poor ones. That’s about the same odds as a company has of developing a successful drug.


Satomi Degami, CFA, Recombinant Capital
Jennifer Van Brunt, Editor, Signals