FOOL ON THE HILL
No one knows if the bulk of common diseases affecting people today are caused by genes or germs. This means that sequencing the human genome may not be the Holy Grail when it comes to understanding and treating the causes of disease. It doesn't make sense, from a risk-reward perspective, for the average investor to make big bets in a debate being waged by scientists, doctors, and researchers -- especially when investing money they don't want to lose.
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There's no reason why the average investor, one with a casual interest in stocks, should be invested in biotechnology companies. None. There's no reason why the average investor should own shares of companies such as Genentech (NYSE: DNA), whose price has fallen to about $41 from $92 last year, or Celera (NYSE: CRA), whose price has fallen to $28 from $151 a year ago, or Human Genome Sciences (NYSE: HGSI), whose price has fallen to about $40 from $106 over the same period. These companies aren't trading near new lows because of a weakening economy or Alan Greenspan. They're at new lows because the value of any asset is equal to the discounted sum of its future cash flows, and it's ridiculous to pay too high a multiple for any company, especially one that lacks a track record of sustained profitability. You can only pay so much for promise. Yet investors jumped into the sector -- as well as similarly risky sectors such as the dot-coms, optical networking, and business-to-business e-commerce -- with vigor. Taking a flier on high-priced, untested, unprofitable (or marginally profitable) companies isn't a game the casual investor should play, ever. There are two dangers regarding biotech investing I want to address here, as well as an easy solution. The first relates to the focus on the human genome, gene sequencing, genomics, and research surrounding protein functions. The idea behind the research is fairly simple: Sequencing the human genome, identifying target genes, and better understanding the role particular proteins play in the human body will enable scientists to better understand the role genes play in disease. This information can be used to help drug companies target research efforts, customize medicine, and speed to market products that cure diseases at the cellular level, rather than simply treating the symptoms. I don't doubt there is truth to this. There is a movement in the field of medicine, however, which says the majority of the world's lethal diseases -- cancer, heart disease, etc. -- aren't genetic in nature at all, but caused by infection. We know this to be true of a host of once-deadly illnesses: tuberculosis, smallpox, whooping cough. They are all caused by pathogens. Problem is, many scientists looked at diseases like cancer, didn't see an obvious pathogen, and decided the cause had to be genetic or environmental. Now, however, the evidence linking diseases long thought to be genetic -- when in fact they may be infectious -- is growing. The bacterium Helicobacter pylori causes ulcers in 20% of infected people; Chlamydia pneumoniae has been linked to heart disease. The source of this information is Judith Hooper's excellent article in The Atlantic Monthly last year detailing the work of biology professor Paul Ewald at Amherst College. Ewald's breakthrough was to apply Darwin's ideas of evolution to the world of microbiology and propose theories about how the development of disease organisms can be manipulated. His conclusion regarding the cause of disease: If the process of natural selection applies at the microbiological level as it does in the animal kingdom, then the persistence of killer diseases over long periods of time doesn't make sense if the diseases are genetically based. "When diseases have been present in human populations for many generations and they still have a substantial impact on people's fitness," Ewald said, "they are likely to have infectious causes." A collaborator of Ewald's, Gregory Cochran, puts it bluntly in Hooper's article: "Maybe instead of the Human Genome Project we should have the Human Germ Project. I don't mean to say that the Human Genome Project isn't worthwhile for many reasons, but all the genes we've found have been for rare diseases. I don't think the common diseases are going to turn out that way." I have no idea whether the bulk of common diseases will boil down to genes and proteins or germs. Neither does the average biotech investor. Does it make sense, therefore, to plunk investing dollars into companies that may or may not be central to the solution? It doesn't make sense, from a risk-reward perspective, for the average investor to make big bets in a debate waged by scientists, doctors, and researchers, if you're investing money you don't want to lose. The second danger springs from the first. The Human Genome Project and companies like Celera and HGSI grab most of the headlines. I don't begrudge this. These companies and researchers sparked a race that will pay dividends for the next 100 years. The risk is that all the media attention creates a kind of deficit bias. It's easy to believe, by dint of the attention showered on genomics companies, that sequencing the human genome is the Holy Grail of biology, etiology, pharmacology, and medicine. Maybe it is. Maybe, however, as is often the case, the area getting all the attention today -- genomics -- is just one leg of the stool. Hooper's article made it clear to me how one-sided my perception has been. This is a natural response. Fool writer Brian Graney wrote about psychologist Robert Cialdini's social proof concept in a recent article. Cialdini, author of Influence: The Psychology of Persuasion, tells us, "The greater the number of people who find an idea correct, the more the idea will be correct." This can easily be applied to research on the human genome. It's what many people in the field of disease research are talking about, and it becomes the correct idea largely because it gets all the attention. Investors who want to avoid this bias must take special steps to expose themselves to a broad range of theories, viewpoints, and articles. Otherwise there's nothing to compensate for the bright lights on the genome side of the aisle. I fell into this trap as a reporter covering the commercial satellite industry a few years ago. An interesting solution to the genes/germs debate, by the way -- one that makes sense largely because it's balanced -- was the topic of a November article in Psychiatric Times by Neil Holtzman, a pediatrician and geneticist. Holtzman is skeptical that the Human Genome Project will cause a revolution in the field of medicine by enabling us to predict diseases as a result of genetic testing. Why? For one reason, only a small percentage of people who contain a genotype that indicates susceptibility to diseases such as breast cancer, colon cancer, coronary disease have an increased risk of developing the disease. The solution regarding the study of disease, Holtzman argues, is to take a holistic approach when trying to identify its causes. "It's time to abandon the paradigm of a single etiology, however, and recognize that in the vast majority of people with common diseases multiple, interacting, etiological agents play a role," he wrote. "Germs, genes and other factors contribute to the high frequency of diseases that plague humankind in developed societies today." For the average investor the solution is simple: The smartest, safest way to invest in disease research is the same today as it was 20 years ago. Invest in a steady, established pharmaceutical company, a company with a hearty pipeline, money-making drugs in the market, an established sales force, and a growing R&D department. Virtually all the major drug companies are involved in biotech research and partnerships, meaning investors can get decent exposure to the cutting edge with limited downside risk. Let the pharmaceutical companies play the role of venture capitalist. Let them vet the upstarts. My job as an investor isn't to determine whether germs or genes cause the majority of common diseases. My job is to locate profitable companies trading at reasonable prices. More than that I cannot do. Have a great day. Richard McCaffery uses "More than that I cannot do" as his excuse for just about everything. His stock holdings can be viewed online, as can the Fool's disclosure policy.
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