Medical Technology Stock Letter

PULSE OF THE MARKET

Over the last two weeks, the stock market has been choppy. The DJIA has worked its way higher, while the technology stocks have continued their correction and the biotech stocks have been mixed. For the two weeks, the DJIA is up 161 points or 3.3%. The Model Portfolio is up 3.8%, and the Aggressive Portfolio is up 9.3%.

We worry when some areas of the market are going up while other sectors are declining. A certain amount of divergence is caused by rotation in leadership, but the recent advance is unusually narrow. We would worry more if the economic background were not very positive. Growth in the current quarter will clearly be less than the 4.2% reported for the third quarter, and corporate earnings continue to exceed estimates. Third quarter earnings again showed a majority of companies exceeding estimates. In past years, more companies would report earnings below estimates than above, and the current situation is very positive.

INVESTMENT SCAN: Genomics

We last discussed the human genome in Issue #251. Since then, the Human Genome Project has made excellent progress and gene discoveries have been big news. There has also been a considerable increase in the number of public companies. This sector continues to attract significant media and investor attention. In this Issue, we will examine the different approaches being undertaken by the specific companies, and also discuss the challenges these companies face in creating shareholder value over the long-term. Background

A genome is the sum total of genetic material (DNA) in the chromosomes of a specific organism. The field of genomics consists of the discovery, analysis and commercial development of genetic information. The human genome consists of approximately three billion base pairs of DNA divided into 23 chromosomes, each containing a portion of the estimated 100,000 human genes. Genes are found in all living cells and are made up of strands of DNA, which is composed of two strands of nucleotides that are joined together. Every gene has a unique sequence of nucleotides, which provides the information required to code for the synthesis of a specific protein or gene product. A gene is expressed through a splicing process (called transcription) within the cell which removes the non-coding portion of the DNA and creates messenger RNA (mRNA). mRNA contains the coding portions of the transcribed gene and directs the production of a protein in a process called translation. At one time, it was estimated that there were 100,000 human genes. Now, it appears that there may be more than 100,000, because we are approaching that number and there appears to be no slow down in the rate of new gene discovery. It is estimated that only 5% of the human genome encodes for proteins, and this is the part of the genome which has attracted the interest of the pharmaceutical companies.

Random Gene Sequencing

Random gene sequencing is the methodology used by the genome companies to create their large databases of genes. Before sequencing genes, the companies prepare libraries of complimentary DNA (cDNA) which are made by taking samples of mRNA from specific human tissue. This mRNA reflects the genes being expressed in that tissue. Before sequencing, the mRNA is transcribed back into DNA. The sequenced fragment provides partial sequence information, but does not determine the role of the identified gene fragment. Random sequencing is providing large databases that will eventually contain information on all the genes in the human body. The goal of these databases is to show which genes are expressed in specific tissue and in what quantity they are expressed. However, for these databases to have value, other research must provide information which relates the gene fragments to specific disease targets for the development of new drugs.

Positional Cloning

Positional cloning utilizes analysis of disease inheritance patterns to find genes linked to a specific disease. This is the technique used to identify the genes for cystic fibrosis and inherited forms of breast cancer. The goal is to find the exact position of the desired gene on the genome. The process begins by analyzing a large and well-defined database of DNA samples which can be acquired from hospital databases or from families with detailed genealogical records. Genotyping is used to measure and determine the regions of the genome that may be linked to the target disease. This process narrows the focus to a specific region of the genome in the search for the specific gene or genes responsible for the disease. However, because of the many steps required for positional cloning, it may take several years to complete the process. It is believed that most common diseases, such as cardiovascular disease, which are caused by genetic defects are the result of more than one defective gene. This adds significantly to the complexity and time necessary to understand the role of each gene. In addition, a gene sequence does not completely dictate a protein's structure. After synthesis, proteins usually undergo additional alterations which can make it more difficult to pinpoint their exact origin.

Hurdles for Genome Companies

Our number one question regarding the investment potential of the genome companies is "where are the products?" We have always felt that there is value to understanding and mapping the human genome, but how does that value get translated into the commercial potential that justifies a public company? The initial revenue is coming from contracts and collaboration with large pharmaceutical companies which are willing to pay for the genome company's ability to provide specific targets for the development of new drugs. However, even if a solid target is provided, the target represents the very beginning of the eight-to-ten year drug discovery process. This means the companies will not receive royalties from any products until well into the next decade. Some of the companies have stated that they plan to become successful by developing a diagnostics business that uses the genetic information to develop screening tests. This is a lot easier said than done. Over the years, many biotech companies have planned to use diagnostic revenue to develop other products, but few have been successful. A successful diagnostic business is driven more by marketing clout than technology, and companies like Abbott aggressively protect their diagnostic franchise. While investors respond to the hope for near-term revenues, the hopes are seldom realized.

CURRENT RECOMMENDATIONS

The biotech stocks have been mixed over the last two weeks. The failure of the group to regain momentum with the DJIA at new highs has been frustrating. However, the low volume correction and the weakness of the smaller companies is powerful evidence that the move in the group is still in its early stages. The action has been typical of what happens when a group is just beginning to return to favor and investors are still nervous. This means that 1996 is likely to be a great year for the biotech stocks. We continue to recommend purchasing your favorite stocks on their near-term dips. For a shorter-term focus we think the second tier stocks that have had corrections are very cheap. In this group are Somatogen, Ligand and Isis Pharmaceutical. We may get even bigger moves in some of the low priced stocks, but they are likely to have some tax loss selling over the next few weeks.

Some of you may find it advisable to do some tax-loss selling. If so, we recommend doubling up your position over the next few weeks and then selling your original position at the end of December. In most years this will provide a profit in addition to establishing the loss. Remember the sale must be at least 30 days after the purchase.

BUY:

AGGRESSIVE PORTFOLIO:

Started Dec. 17, 1987 with $100,000 - This portfolio is designed for aggressive investors with a shorter-term view. The use of margin increases risk.

                          Price      Cost       Value
     7,000 Agouron           $30.13      $84,840      $210,910	
     9,000 Amylin              7.13       49,995        64,170
     4,000 Arris               11.5       33,835        46,000
     8,000 Calgene             5.25       44,954        42,000
     8,000 Celtrix             1.88       71,710        15,040
     1,235 Chiron             91.50       43,097       113,003
     1,500 Collagen           18.00       27,472        27,000
     7,000 ImmunoGen           2.00       57,444        14,000
     6,000 Isis               10.88       39,142        65,280
     5,000 Ligand              7.88       46,712        39,400
     7,000 Ribi ImmunoChem     4.00       51,367        28,000
     7,000 Somatogen          14.50       64,418       101,500
    10,000 T Cell Sciences     3.25       49,874        32,500
    10,000 Xoma                2.19       95,290        21,900				
                          ---------     --------     ---------
                                                       820,703
                                       Less Debit      408,109
                                                     ---------                                       
                                       Net Value      $412,594


       
  Jim McCamant                           John McCamant
  Editor                                 Associate Editor



                               PRICE                 
                         _________________________            Mkt.   Equity
                              Orig.                  #of      Value   per    Currrent
Symbol  Company          FY   Rec.  Current Target  shrs.(m) ($mil.) share   Recommendation
______  _______          ___  ____  _______ ______  ________  ______  _____  ______________
AGPH    Agouron          JUN  4.00   30.13    40      7.3     220     $2.44   BUY under $30
AZA     Alza             DEC  6.25   21.75    40     82.8    1801     $5.22   BUY under S22
AMGN    Amgen            DEC  0.46   47.75    NA    283.2    13523    $5.59   SELL
AMLN    Amylin           DEC  7.88    7.13    16     24.4    174      $2.31   BUY under $9
ARRS    Arris            DEC  6.75   11.50    20      8.7    100      $1.46   BUYunderS12

BTGC    Bio-Tech Gen     DEC  3.63    3.75    12     43.8    164      $0.82   BUY under $5
CGNE    Calgene          JUN 13.00    5.25    25     30.2    159      $1.18   BUY under S10
CTRX    Celtrix          MAR  6.75    1.88    12     13.7    26       $2.06   BUY under $6
CHIR    Chiron           DEC  4.63   91.50   150     40.4    3697    $15.68   BUY under S95
COCN    CoCensys         DEC  5.25    6.75    12     19.0    128      $0.49   BUY under S8

CGEN    Collagen         JUN  5.50   18.00    50      8.9    160      $4.32   BUY under S25
CTII    CytoTherapeutics DEC  8.75   12.50    20     13.3    166      $3.78   BUY under S12
ICOS    ICOS             DEC  6.00    6.38    20     32.2    205      $1.39   BUY under S8
IMNX    Immunex          DEC  6.75   15.88    35     39.6    629      $3.50   BUY under S18
IMGN    ImmunoGen        JUN 11.00    2.00    12     12.5    25       $0.53   BUY under $8

ISIP    Isis             DEC  7.63   10.88    25     21.7    236      $2.05   BUY under S12
LGND    Ligand           DEC  6.13    7.88    20     26.8    211      $1.21   BUY under $12
PRCY    ProCyte          DEC  8.00    2.69     6     12.9    35       $3.73   BUY under S3-1/2
RIBI    Ribi Immuno.     DEC  4.25    4.00     8     18.8    85       $1.78   BUY under S5
SMTG    Somatogen        JUL 18.00   14.50    50     18.5    268      $2.77   BUY under S20

TCEL    T Cell Sciences  DEC  4.00    3.25    10     17.0    55       $0.56   BUY under $6
XOMA    Xoma             DEC 16.00    2.19    12     24.2    53       $1.33   BUY under $5


Model Portfolio                                                     Shares    Total     Today's
_______________                                        Company      Owned     Cost      Value
The Model Portfolio is designed to reflect             _______      ______    _______   ______
specific recommendations. We began the                 Agouron      1900      $23,028   $57.247
Model Portfolio on Dec. 22,1983 with                   Amylin       4900      $27,220   $34,937
 S100,000. In Issue #5, April 1984, we                 BioTech Gen.  500       $3,409    $1,875
 became fully invested. All profits are                Calgene      5000      $31,250   $26,250
 reinvested. Stocks recommended since then             Celtrix      2300      $17,991    $4,324
 may be equally attractive but may not be in           Chiron        710      $28,794   $64,965
 the Model Portfolio. Transactions and                 Collagen     2000      $31,205   $36,000
 positions are valued at closing or bid                ImmunoGen    3000      $33,000    $6,000
 prices. No dividends are credited and a 1%            Isis         5000      $24,619   $54,400
 commission is charged. We don't use                   Ligand       1300      $14,943   $10,244
 margin. Interest income is credited only              ProCyte      4000      $20,500   $10,760
 on large cash balances.                               Ribi Immuno. 4000      $22,012   $16,000
                                                       Xoma         1400      $18,025    $3,066
                                                                              _______   _______ 
The Aggressive Porffolio joined the Model                                   Equities   $326,068
Portfolio in the Letter on 12/17/87.                                            Cash       $219
                                                                                        _______
                                                                                 Total $326,287
                                                                                 
PORTFOLIO PERFORMANCE vs. DJIA   DJIA     Model   Aggressive  
         Last 2 weeks            3.3%     3.8%       9.3%
         Year-to-date           29.6%    31.1%     156.5%
        Since 12/17/87         158.2%   187.7%     312.6%

Contents based on information from sources believed to be reliable but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as an offer or the soiicitation of an offer to buy or sell any security. The publisher and its associates, directors or employees may have positions in and may from time to time make purchases or sales of securities mentioned herein. We cannot guarantee and you should not assume that future recommendations will equal the performance of past recommendations or be profitable.