Take Caution With Stem-Cell Stocks

ByABC News
August 10, 2001, 2:38 PM

Aug. 10 -- President Bush's decision to support limited funding for stem-cell research is good news for companies that are involved in this area. But investors might not want to jump on the stem-cell bandwagon just yet.

That's because most of the work done in stem-cell research thus far is just that research. While stem-cell research is a very promising area for the future of medicine, it could be years before stem-cell therapies reach the commercial stage.

"I think it's going to be at least several years before this research really starts to pay off, and that definitely increases the risk for investors," says Amy Arnott a senior analyst at Morningstar who follows pharmaceutical and biotechnology stocks.

And given the small and somewhat speculative nature of these companies' activities, Arnott say investors should probably limit their investment in stem-cell research companies to a small percentage of their total portfolios, which she defines as less than 5 percent.

A a safer and more diversified way to play the sector is by buying a mutual fund that invests in the biotechnology or health-care sectors, she adds.

Profits Elusive

But for those who do want to partake in the individual stocks of these companies, there are some key factors to watch out for in this young field.

Albert Rauch, who looks at genomics companies for New York-based investment bank Ladenburg Thalmann, says it is important to pick out companies that are leaders in their sector and that have shown progress in getting products out to the market.

"I would look not so much as who's developing most intellectual property, but who's thinking the cleverest about how to get stem cells into commercialized property," says Rauch.

Take Geron, which is considered the most established company in this area. Based in Menlo Park, Calif., Geron is focused on developing and commercializing therapeutic and diagnostic therapies for cancer and chronic degenerative diseases. With $22 million in cash and $1.8 million in revenue at the end of the quarter ended March 1, 2001, Geron was by far the largest of the three publicly traded stem-cell companies.