You can’t really call the fact that today’s stock market is being driven by sector investing a secret, exactly, since even a quick glance at the actual performance of the stocks that make up the S&P 500 and the Nasdaq shows you what remarkably wide disparities there are between stocks in different sectors. And the rotation between sectors has become increasingly fine–that is, instead of all Internet stocks being in favor, only B2B or infrastructure stocks will be–and increasingly fast. One consequence of this is that talking about the performance of indices as broad as the Nasdaq or the S&P, while valuable in the long term, doesn’t really tell you much about what’s actually happening in the short term. (Which, of course, is probably a good thing for investors.)
For instance, today’s 200-point drop in, yes, the Nasdaq represented the culmination (perhaps, though who knows?) of the latest rotation out of a sector, in this case biotech stocks in general and genomics stocks in particular. Most of these stocks were essentially unknown to investors as recently as six months ago, but since then they’d pretty much gone straight up, rising in some cases 2,000 percent and better. If there was a rational reason for this run-up–and I still believe there usually is one, at least at the start–it was the enormous profit potential that seemed to be offered by gene-based drug research and the faster-than-expected progress that the public Human Genome Project on the one hand and private companies such as Celera Genomics on the other were making in sequencing all the genes in the human body.
Now, while gene-based drugs will undoubtedly play an important role in our medical future, there were of course good reasons to be skeptical about the explosion in value of these companies, reasons having to do with the uncertain status of intellectual property in the field (that is, can you patent a gene?), the recent problems encountered by gene-based therapy, and the sheer vagueness of what “sequencing” the entire human genome would actually mean. But investors rather sunnily overlooked these potential stumbling blocks in favor of a single-minded focus on the utopia–both medical and business–that lay ahead. At least they overlooked them until last week.
Since last Monday, the Nasdaq biotech index has fallen 28 percent, and today alone it fell 12.5 percent. Unlike many other sector rotations, though, which often appear to be prompted by nothing more than a “change in investor sentiment,” today’s decline had an explicit cause, namely the joint announcement by Bill Clinton and Tony Blair that “raw fundamental data on the human genome, including the human DNA sequence and its variations, should be made freely available to scientists everywhere.” Many investors have been assuming, correctly or not, that a fundamental element of the genomics business will be the ability to patent individual genes, which will presumably give companies the sole right to develop drugs using those genes. Just last week, in fact, Celera broke off negotiations for a partnership with the Human Genome Project because it demanded (sensibly enough for a profit-seeking company) to retain exclusive commercial rights to any products that were developed by the partnership. The Clinton/Blair statement, with its implications of completely free access to any sequenced data, seemed to cast a shadow over the future profitability of the industry. Even more striking was a follow-up statement by Clinton press secretary Joe Lockhart, who said that the announcement meant that genes should not and would not be patented.
In response to the statement, the biotech companies have taken great pains to insist that sequencing the human genome alone was never going to be their key source of profitability, and that just as financial companies are able to make lots of money using freely available information, the key for drug companies was always what they could do with the information, not the information itself. This seems plausible, but it’s certainly true that the immediate disclosure of sequence data will eliminate a source of competitive advantage, since it’s a lot easier to develop a better gene-based drug than your competitors if your competitors don’t even know that a given gene exists. At the same time, while those investors who dumped their stocks in a panic today should have realized that sequencing alone wasn’t going to make a company like Celera a success, it’s also the case that such companies have certainly spent enough time trumpeting the importance of their sequencing efforts that investors can be forgiven for accepting the hype.
Clinton and Blair did say that “intellectual property protection for gene-based inventions” would be essential, but they did not really explain what “gene-based” meant, though it certainly sounds more like patent protection for new drugs rather than for the genes themselves. In a way, in fact, the statement ends up asking as many questions as it answers, which isn’t surprising given how complicated intellectual-property law has become. (To take just one example: Is there a difference between inventing something and discovering it?) And while questions are good things, they’re not what investors want to hear when they’re buying stocks with nosebleed valuations.