Last Monday I talked about the undiscovered second or third tier stocks that I'm always trying to discover. Today, we'll take a look at one of the hidden beauties I have my eye on.

I am a big fan of the biotechs, and I put the gene researchers in that category, as their focus is certainly to lead to new gene-based drug candidates. We"ll gently touch on the science from an investor's perspective, as we are not knowledgeable in biology by any strectch of the imagination.

The stock is Hyseq, Inc., based in Sunnyvale, Calif. (HYSQ). They have the world's fastest means of screening large batches of DNA samples, achieving an analysis rate of more than 1 million partial gene sequences per month, which is more than anyone else. At year-end, they had a database of over 4 million human partial gene sequences, exclusive of the database they created for Chiron Corp., its partner in solid tumor research. They also have a collaborative agreement with a division of Perkin-Elmer, a leader in DNA analysis systems. In February, 1998 they announced a collaborative agreement with the University of California San Francisco, to conduct research on genes that may relate to arteriosclerotic heart disease, stroke, diabetes, and hypertension.

They went public on August 8, 1997, which at that time was the largest U.S. biotechnology IPO. Their first quarter ended March 31, 1998 showed a net loss of $2.689 million, or $.21 on 12,734 million shares. At year-end they had cash and investments of almost $60 million, so they have a cash-burn rate of around 5 years. Stockholders' equity is also approximately $60 million, or over $4 per share. No sense being too precise, because as you know, that number is coming down every day, which is the nature of biotech's unless they get cash from their partners.

Hyseq came out at 14, and the first day ranged between 14 1/2 and 15 5/8, closing at 14 7/8. By the end of September, it hit 21 5/8, and then went down to 7 7/8 at year-end. It then went up to 15 1/4 in mid-May and touched 9 3/4 last week. Today, it was up 3/4 at 10 7/8 on 60 thousand shares, which is a little higher volume than usual for them. This was in apparent response to an announcement before the market opened, by Perkin-Elmer and Hyseq, that they are offering their advanced DNA sequencing chip to pharmaceutical research companies.

I have made one trade in the stock at a profit, and I intend to get back in. There seems to be no hurry, although with this kind of stock, you never know. Try to buy right, which means the low 10's or high 9's, and you probably won't be overpaying. Their high-quality partners are a validation of their technology, which in addition to what I've read, tells me that in due time, this stock could be a monster. Stay tuned.

The Market Pro - June 29, 1998