HEADLINE-GRABBERS COULD MAKE INVESTORS ILL: THERE’S DANGER IN CANCER-CURE STOCKS

Don’t get too caught up in the hoopla surrounding the search for a cancer cure, warn investment experts.

In three years, some of these speculative stocks could look like Yahoo! Inc. and other successful Internet companies. Or, they could look like 40 miles of flooded swamp.

Stocks like EntreMed Inc., Idec Pharmaceuticals Inc. and Ligand Pharmaceuticals Inc. may be grabbing headlines but they’re far riskier plays than well-established drug companies like Bristol-Myers Squibb Co. or Eli Lilly & Co.

“You get sucked in and buy these (speculative) stocks, and you could wind up underwater,” says Larry Wachtel, investment analyst at Prudential Securities in New York.

“You read about this in the paper, and you get a sense of urgency, but the real cure is way off,” perhaps seven to eight years away.

The annual meeting of the American Society for Clinical Oncology in mid-May created the latest buzz about cancer cure drugs.

“The conference ends; days turn into weeks and into years and the drugs still haven’t come to market,” Mr. Wachtel says.

“You’re buying the excitement, and you should be buying the fundamentals.”

In the case of these emerging biotechnology concerns, that means checking the success rate of the companies’ other drugs, what doctors think about them or how famous hospitals like Memorial Sloan-Kettering Cancer Center regard the drugs.

Or investors can leave the legwork to the experts and invest in biotechnology-based mutual funds. Health care funds, which invest from 1% to more than 40% in biotechnology shares, had annual returns that ranged from 14.6% to 37.6% for the 12 months ended May 1. At the same time, the Standard & Poor’s 500-stock index gained 40.2%.

Two funds, Fidelity Select Bio-technology and Franklin Biotechnology Discovery, contend they are the only pure biotechnology plays.

avoiding the speculative

Franklin is new and investment results were unavailable, but Fidelity Select, which had a 31.27% gain for the same 12-month period, started in 1985. The fund’s assets of $536.6 million have remained stable for the last few years, says Jim Griffin, a Fidelity spokesman in Boston. The fund’s largest holding is Genentech Inc.

Many investment professionals guide their customers into these mutual funds or established stocks and away from the speculative stocks.

“It takes an awful lot to market drugs and make them successful and viable,” says Marc Greenberg, portfolio manager for Avatar Investors Associates Corp., a New York money manager.

“It’s different from what works on a laboratory rat and taking the drug through FDA (Food and Drug Administration) trials.”

A lot of the interest in these unproven, biotechnology companies develops because everyone wants to find a cure for cancer, probably the world’s most feared disease. Cancer kills more than 1,500 Americans daily and causes one in every four deaths in the United States, according to the American Cancer Society.

“A COMPLEX DISEASE”

While there’s unlikely to be a magic bullet given the various kinds of cancer, the new drugs provide hope of curing some types. Still, experts refuse to speculate about which cancers will be cured first or even to attach their names to any statement regarding a cure.

“Cancer is a complex disease” is all one official would say, and she spoke on the condition of anonymity. True, so what better investment than something that could help cure a scourge of mankind?

Yes, but beware the EntreMed trap. The company has tested new drugs that attack blood vessels that nourish tumors. A front-page story about it in the Sunday New York Times last month sent the stock soaring sevenfold to $85 a share the following morning. By the end of the week, the stock had plummeted to $33.25 a share, which is still about $18 too high for Mr. Wachtel.

“Buy for the long term; the hype is short term.”

Mr. Greenberg and others prefer a cancer play with established drug companies.

“What you need is money behind you, somebody who knows how to put the drug through the FDA. That’s Bristol-Myers,” he says.

Does Avatar Investors, Mr. Greenberg’s firm, invest in these large drug stocks?

“We own them. We’re putting our money where our mouth is,” the portfolio manager says.

Besides Bristol-Myers, Mr. Greenberg also invests in and likes two smaller stocks, Centocor Inc. and BioChem Pharma Inc.

Avatar puts only about 1% of the $3.4 billion it oversees into biotechnology stocks. Avatar jointly manages some of the $3.4 billion with other companies.

Mr. Wachtel, who recommends avoiding the smaller stocks, agrees that Bristol-Myers looks attractive. But many drug stocks already have high multiples, apparently leaving limited opportunity for growth.

Bristol-Myers has a price/earnings ratio of 34 and in early June was trading at $112, a little below its 52-week-high of $117. Over the same period, the Standard & Poor’s 500 p/e ratio was 25.

Despite the understandable warnings, investment professionals say a few of these biotechnology stocks may do well. In 1995, some people “bought Internet stocks and three years later had a massive payout,” Mr. Wachtel says.

Caution aside, the potential for cancer cure drugs remains colossal.

“If you want to talk about a blockbuster drug, worth billions and billions of dollars, this would be the biggest drug ever if they find a cure for cancer,” Mr. Greenberg says.

This would likely be a series of drugs, perhaps produced by several companies. But which ones?

Steven Adler, president of the Tampa-based ASM Index 30 Fund, has an encompassing solution. Any advance in cancer cures is “a buying signal for equities,” he says.

“An individual investor will get there late on any one stock, but you have to take the macroeconomic outlook — this will help the health of the world.”

Race for the cure

Cancer-fighting drugs in various stages of development

Company Drug To Combat

Bristol-Myers Squibb Taxol ovarian and advanced breast cancer

Eli Lilly Raloxifene osteoporosis with reduced breast cancer incidence

EntreMed Angiostatin, Endostatin tumors

Genentech Herceptin metastatic breast cancer

Idec (with Genentech) Rituxan non-Hodgkin’s lymphoma

ImClone C225 head, neck cancer

Ligand LGD1550 cervical, head and neck cancer

Sugen SU101 brain, prostate cancer

Zeneca Tamoxifen breast cancer