Biotech Train Heads for Gains
Life science stocks emerge from 'dot-com' derailment
By Ted Agres [TheScientist]
The biotechnology business has ridden a roller coaster in the financial markets for the
past 18 months. The gyrations have been enough to make even the most stalwart
investor swallow hard. Enthusiastic over the potential of human genome sequencing and
depressed about the downturn in the dot-com markets, investors drove up values in
biotech stocks by 300 percent and more. But by spring, the high-tech stocks' Titanic
pitches had finally helped tow biotech stocks down by 50 percent. Now, with analysts
forecasting an imminent upturn in the biotech and life science markets, it's time to get out
the motion-sickness pills.
The ride could have been even more dizzying. Compared to last year's sinking Internet
stocks, the life science issues have fared well, even benefiting from high-tech woes by
attracting public funding and private venture capital. Analysts still express concern,
however. If wary investors don't turn back to biotech as fast as the experts think they
should, or if the big pharmaceutical companies fail to achieve challenging goals in
bringing to market new blockbuster drugs (that can generate $1 billion in sales), the
slowdown may hinder smaller companies from raising capital to fund research and
development, launch new products, or simply stay in business.
Even if stock values rise, analysts still expect some jobs to be lost and others to be
created as consolidations sweep the pharmaceutical and biotech sectors this year. While
some biotech companies will go out of business, competitors eager to purchase talent
and technologies at bargain prices will acquire other businesses. Large pharmaceutical
companies will swallow up biotech firms to procure instant expertise in such critical
areas as bioinformatics. Other, stronger biotech firms will stand their ground and
generate revenue by licensing their technologies or creating alliances and collaborations
with drug manufacturers.
"The good news is, even with consolidation among those companies, there is real
value," says Morrie Ruffin, vice president for business development with the
Biotechnology Industry Organization (BIO) trade group in Washington, D.C. "And as these
companies become larger and have staying power, there will be more jobs and the
potential for more collaborations with smaller companies." Adds Franklin Berger, senior
biotech analyst for J.P. Morgan in New York, "I don't know of another group besides
biotech and pharmaceuticals that looks as exciting as they do right now."
The Biotech Train
Investors looking for a better ride than the dot-coms could offer headed to biotech stocks
early in 2001. "Biotechnology has had a very significant run" this year, says Rachel
Leheny, a biotech analyst for Lehman Brothers in New York. "It's really outperformed the
market. And when the market turned toward the positive a few weeks ago, biotech really
turned toward the positive, in some cases, by 30 to 40 percent. We think there's relative
strength in biotech versus certainly some of the other growth sectors and probably the
other health-care sectors," she says.
The American Stock Exchange's Biotechnology Index, which comprises 16 biotech
companies representing a cross section of the industry, achieved a six-month high in
June, but in so doing, it only matched December's levels. Over the past 12 months, the
technology-heavy Nasdaq lost 40 percent in value overall as the Amex biotech index grew
by 14 percent. Last summer, the same index jumped nearly 300 percent above the
previous year's totals.
Biotech companies don't fare well with investors who pull out their funds when the
profits rise too slowly. They prefer to rely on "patient money," that is, capital from investors
who realize that therapeutics and drug development can be a long, expensive process
and who are willing to wait. Bringing a drug to market often takes 10 years and costs
$500 million or more. "The product cycles are very different for biotech compared to
high-tech or other industries," says Emily Hall, a biotech analyst for Morningstar Inc. in
Chicago. "It's almost like a cable company that has to lay down an infrastructure before
doing business. They have to rely on funding from investors and the equity market to keep
going before their products are in place to sell."
Unlinking the Two Techs
But in 2000, few biotechs attracted the long-term money they had yearned for from the
fretful stock market. Partly because of naiveté, investors tended to view the biotech and
high-tech sectors as being interchangeable if not identical. After the dot-com stocks
peaked and started to fall in March 2000, many investors lost confidence in science and
technology stocks, dragging down the value of biotech stocks, regardless of the
companies' financial status or profit expectations. At the same time, other
investors--joining the dot-com desertion--decided biotech would replace high-tech as the
next new profit source. So those stocks got pushed up to higher values, even with the rest
of the market in decline. "A lot of people mistakenly thought that genomics and biotech
were another type of Internet," says Steven Newby, chief investment officer for
GenomicsFund.com, a Gaithersburg, Md.-based mutual fund that invests solely in biotech
stocks.
By the end of the year, biotech companies across the board had raised more than $35
billion in all forms of financing--three times more than the amount raised during any
previous year, according to a report by Ernst & Young.1 For the industry, this capital inflow
has been both a curse and a blessing, says Kevin Tomaselli, vice president of discovery
research and co-founder of Idun Pharmaceuticals Inc., a private startup in San Diego. "It's
been a blessing because a lot of the money came into biotech once it was apparent that
the dot-com boom was just a phenomenon," he says. "That drove the biotech frenzy a
year ago, which was good for the industry. Now, the curse was that people moving into
biotech bid it up too high, and it all had to go down."
Perhaps the most dramatic example of this roller coaster phenomenon is industry
giant Celera Genomics Group, a division of the Applera Corp. Celera saw its stock price
jump from $8 per share in July 1999 to a whopping $276 in February 2000 as news of the
company's pending success in sequencing the human genome gripped the nation's
attention. In less than a year's time, however, the Rockville, Md. company's stock lost 90
percent, falling to about $28 per share (it lately has been trading in the mid-$40s range).
"Some of the good [biotech stocks] declined 80 and 90 percent from the highs to the
lows," Newby says. "That's pretty severe, especially for companies that have strong
balance sheets and are debt-free." Most biotech stocks declined by about 50 percent
during the latter half of 2000 through the first quarter of this year, as shown by the Nasdaq
Biotechnology Index.
Despite lowered stock prices, several of the biotech industry leaders are well
positioned for success, with multiple new products under development and stores of
cash, assembled during last year's market highs. "Every company that was worth its salt
used that period of the rally in the biotech sector to raise cash," says BIO's Ruffin. Human
Genome Sciences Inc. (HGS), for example, has more than $1.5 billion in cash, according
to the GenomicsFund.com. The Rockville, Md., company has five drugs in various stages
of clinical trials, including two produced with albumin fusion technology: Albuferon, for
hepatitis C patients, went into Phase I trial in March; Albutropin, a long-acting recombinant
growth hormone, was approved for Phase I trial in June.
Another heavyweight, Millennium Pharmaceuticals Inc., which focuses on
small-molecule biotherapeutic and predictive medicine products, has six drug candidates
in clinical trials and many others at the preclinical stage, according to the
GenomicsFund.com. Millennium, based in Cambridge, Mass., manages more than 20
pharmaceutical alliances and holds cash reserves of more than $1 billion. Celera
Genomics also boasts more than $1 billion in cash reserves, which it may use to move
its genomic treasures toward drug discovery and development, predicts Mebane Faber,
chief technology officer for the GenomicsFund.com investment group, in a recent report.2
Adds investment chief Newby, "these companies were very astute when the market was
strong a year or so ago and they sold some stock at very high levels and now have the
cash to see them through the many years of discovery and development."
Now is also a good time to be starting a biotech company because the venture
capitalists (VCs) are looking for companies with real technology, says Lita Nelson,
director of Massachusetts Institute of Technology's Technology Licensing Office. Now that
the VCs "have lost their love for the 'dot-bombs,' it has been easier to get biotech
companies started during the past six months than anytime in the past several years,"
she says. Technology transfer and licensing from universities to businesses also have
been positive, Nelson says, largely due to the ease with which biotech firms are able to
spin out from universities.
But even if present biotech investments appear promising, the long-term outlook remains
uncertain. Alan Walton, senior general partner for Oxford Bioscience Partners, a Boston-based
venture capital fund that invests in biotechnology start-ups, says he doesn't expect to see a
significant resurgence of biotechnology companies going public for a couple of years.
Because of this, venture capitalists will be forced to do more follow-on investments, putting
resources into existing enterprises to sustain them until they can attract public funding as the
market rises. As times goes on, these investors will have less money available to support new
ventures. "In the short run, it's great," Nelson says, "but the long run remains to be seen."
So far, universities and nonprofit research institutions have not suffered from the
downturn in the public equity markets. "There might be some downturn in
industry-sponsored grants to universities. But this would be in the long-term, not the
short-term," says MIT's Nelson. But since people generally want to donate appreciated
stocks when they are at their highest valuations, endowments to universities and
institutes may not experience their best years ever. As for the markets in general, "I think
we are already seeing a rebound," Newby says. "The biotechs seem to be leading us out
of the morass that we were in for some time."
Ted Agres (tagres@usa.net) is a freelance writer in Washington, D.C.
References
1.Ernst & Young, Convergence: The Biotechnology Industry Report, New York: Ernst & Young Inc., 2000.
2. M. Faber, Genomics Outlook 2001: The Post-Sequencing Era, Gaithersburg, Md.:
GenomicsFund.com, 2001.
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