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Taking Stock

Drug companies have discovered women's health care in a big way. Now investors are asking, Is there a Prozac or Viagra in the offing?


Since the days when investment wizard Peter Lynch dazzled wall Street with his simple strategy of "buy what you know," the idea of investing in your own experience has become conventional wisdom on Wall Street, with Mac users buying Apple stock, khaki-wearers buying the Gap, and Netizens buying, well, every .com stock in sight. And while investing in your own health is clearly a more serious matter than picking up shares of Starbucks because you like the coffee, the fundamental idea is the same: Your concerns and interests are likely the concerns and interests of others, which means that some company, somewhere, must be figuring out how to make money off them. Successful investing, in turn, means finding those companies.

Oddly, though, before the nineties -- the mid-nineties, really -- you wouldhave had a hard time finding any public companies that saw the women's-health-care market as a significant business opportunity. Only in the past three or four years, in fact, has something we can call a women's-health-care industry come into existence, and it is an industry that is still very much in its early stages. There are probably fewer than twenty public companies specializing in women's health care (that is, "pure play" companies), and many of them are micro-cap companies, with market capitalizations below $100 million. It is, needless to say, a risky field for the individual investor.

At the same time, giant drug companies -- including Merck, Lilly, Johnson & Johnson, and American Home Products -- have come to recognize that the aging of the baby-boomers will create a massive demand for products ranging from postmenopausal drugs to mammographies to drugs that can fight breast, cervical, and ovarian cancers. That recognition has led them to establish separate business units dedicated to women's health care.

From an investor's perspective, then, the women's-health-care field is rather dramatically divided, with a set of tiny, pure-play companies on one side and a set of giant, diversified drug companies on the other. That division is also characteristic of the biotech field as a whole, but women's health care has yet to have a pure-play company break out, as biotech firms like Amgen and Biogen have.

In typical biotech fashion, most of the pure-play companies went public all at once, in a boomlet in early 1996, when the overall stock market was ravenous for initial public offerings (IPOs). Among others, Cytyc, ESC Medical Systems, Biopsys, Digene, and Trex Medical all went public in 1996, and investors snapped them up, so much so that at the end of that year, Fortune decreed that the women's-health-care field was "poised for greatness" in investment terms.

Well, that prophecy proved singularly unprophetic -- or at least it has so far. In retrospect, it seems clear that most of these companies went public far too soon. Many of them had no real revenue streams, and their major products had yet to make it through the FDA approval process. The chance to raise capital via an IPO is, of course, nearly impossible to resist, but these companies were a long way from being powerhouses like Microsoft. After meandering through 1997, almost all of these firms -- with the notable exception of Cytyc (which makes a new test for cervical cancer) -- peaked near the beginning of 1998. The chaos of the summer devastated these companies' shares, as it did those of most small-cap stocks, and they've made only tentative recoveries since. ESC Medical Systems, for instance, which makes lasers for cosmetic and clinical applications, has watched its stock fall from $38 to below $7, while shares of Biofield, maker of a non-mammographic test for breast cancer, now trade at about 33 cents a share (down from a 52-week high of $5), and those of HumaScan, which makes a similar test, can be picked up for less than a dime. Last spring, HumaScan's stock was at $13 a share.

As sobering as the past year has been for investors in these companies, though, women's health care obviously remains a field with enormous growth potential. Four years ago, it would have been hard to find a stock analyst who followed the industry. Today, several major investment banks have analysts who track the field, including Melissa Wilmoth at Salomon Smith Barney, co-author of an influential 1997 report, The New Women's Movement, which argued that the women's-health-care industry was on the verge of exploding.

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