Filed Under: , ,
Tickers in this Article: DCGN, ILMN, HHD, HHK, HHV
I routinely receive emails from readers asking for feedback on a specific stock, and unless I have absolutely no clue, I render an opinion. A couple of days ago I received a request to share my thoughts on a tiny Icelandic company, deCODE Genetics (Nasdaq:DCGN).

Its claim to fame: In late 1998, the Icelandic parliament passed a law that gave the Reykjavik-based company the rights to manage the country's health information database. A private company was in possession of the nation's entire genetic code. Many opposed the move, suggesting this was an invasion of privacy breaking the confidentiality between doctor and patient. Ultimately, the deal went through because politicians felt the common good outweighed individual rights. What followed was another example of investor greed and financial disaster.

Shares Fly Off The Shelves
Founded in 1996, partially by former Harvard and University of Chicago professor Dr. Kari Stefansson, who is now CEO and board chairman, deCODE's genetic database means to assist researchers in curing serious diseases. While it hasn't cured any diseases that I know of, it has burned through a lot of cash. At the end of 2007, it had an accumulated deficit of $631.2 million and negative shareholders' equity of $145.6 million.

Another roadkill on the biotechnology highway? It didn't start that way. Before obtaining a 12-year term to operate Icelandic Health Database on January 22, 2000, deCODE entered into an agreement with Hoffmann-La Roche to do joint genetic research. The deal promised $70 million in research funding and $130 million in scheduled payouts for reaching certain commercialization milestones. Today, Hoffmann-La Roche, through its associate company SAPAC, owns 5% of the common shares. The database deal created huge demand from Icelanders for deCODE's "gray market" shares. In early 2000, those gray shares were selling for $56.

Bright Lights, Big City
The fervor for deCODE was such that it went public July 18, 2000, at $18 a share. Its stock closed the first day of trading up 41%. Opening at $28.50, it jumped to $31.50, finally closing at $25.44. By 2002, shares were down to $6. Today, they sit at 50 cents. Plenty of Icelanders have lost their proverbial shirts. Who's to blame? So many that it would take far more than 800 words to untangle the mess. However, one victim of the feeding frenzy admitted in a 2002 story in a U.K. newspaper that deCODE wasn't to blame because this victim didn't understand what deCODE did. I still don't, especially the part about how it makes money. So, perhaps investors are to blame. (For a better understanding of how to evaluate these types of companies, check out The Industry Handbook: Biotechnology.)

Business Model Broken
I've never understood why biotechnology companies go public. If they don't make money and have no hope to do so, individual investors shouldn't be able to buy these shares. There's just too much potential risk. Nonetheless, deCODE did. From its inception in August 1996 to the end of 1999, total combined revenues for the three and one-half year period were $29.3 million while operating losses were $45.5 million. On that performance, underwriters were able to raise net proceeds of $160.7 million after underwriting fees, which deCODE promptly burned through.

IPO investors contributed 57.3% of the capital in return for 22.7% of the shares, a dilution of 73.4%. Existing shareholders, on the other hand, paid an average price per share of just $3.94. At least someone benefited.

There Are Other Options If You Must
DeCODE's revenues vacillated between $46.8 million in 2003 and $40.4 million in 2007. At the same time, its operating loss increased from $34.8 million in 2003 to $87.6 million in 2007. This dog won't hunt. For those who must invest in biotechnology, there are other alternatives. First, you could buy Illumina (Nasdaq:ILMN), also in the genetics business, which is raising $300 million in a secondary offering and might use it to buy pint-size companies like deCODE. Unfortunately, the stock is a little pricey.

If you want exposure to some areas where it competes, look at exchange traded funds (ETFs) from HealthShares. Three are in the ballpark:
1) HealthShares Diagnostics (NYSE:HHD);
2) HealthShares Cancer (NYSE:HHK); and
3) HealthShares Enabling Technologies (NYSE:HHV).

All would be less volatile than a single exposure to deCODE, and each has outperformed deCODE over the last year. Lastly, you might simply find a company that makes money - any company. It can't be much worse. (Learn how to pick the best ETFs of the bunch; read Five Ways To Find A Winning ETF.)

Bottom Line
I don't know why investors feel compelled to make matters more difficult for themselves. The first rule should always be to invest in companies that are profitable - now and in the future. Wasting your time and money on perennial losers is simply dumb, especially when you consider the number of profitable companies that trade on American exchanges.

comments powered by Disqus

Trading Center