George:
Analysts say outlook bright, but drug approvals must come through
By JENNIFER LANTHIER
Biotechnology Reporter The Financial Post
The fall rally biotech investors have sought since the summer of 1996 may finally be on its way, analysts say - but only if the
industry can make good on its promises.
"I believe the sector bottomed out in the first half of 1997 and it's poised to turn around," says analyst Andr‚ Uddin of
Midland Walwyn Capital Inc.
Uddin points to a string of good news expected before the end of the year. The list includes
further international filings from BioChem Pharma Inc. (BCH/ME) for government
approvals of its hepatitis B treatment Lamivudine, strategic partners for Xillix Technologies
Corp. (XLX/TSE) and Micrologix Biotech Inc. (MBI/TSE), and government approvals for
Urso, the liver treatment developed by Axcan Pharma Inc. (AXP/ME) or Tru-Scint, the
imaging agent developed by Edmonton's Biomira Inc. (BRA/TSE).
Further approvals are also expected before the end of the year for products at Biovail
Corp. International (BVF/TSE) and possibly QLT Phototherapeutics Inc. (QLT/TSE).
However, analyst Ezra Lwowski of Toronto's Yorkton Securities Inc. says biotech
companies must boost performance and start delivering results on schedule before any
boom can take place.
"There's still an overhang of unfulfilled milestones, unfulfilled promises," says Lwowski. "For
the sector as a whole, people will be very particular about valuations and want to see results."
In both the U.S. and Canada, the biotech sector has failed to keep pace with the rest of the
market this year. The Toronto Stock Exchange 300 composite index has risen about 14%
year to date, while its biotechnology and pharmaceuticals subgroup has gained less than 9%
- and more than half of that is thanks to the heavy weight of BioChem Pharma.
Few Canadian biotech analysts are sounding as bullish as their U.S. counterparts, although
all preach the merits of selective stock-picking.
In a report published Aug.18, analyst Alex To of Donaldson Lufkin & Jenrette Securities
Corp. suggested a rally after Labor Day was likely as biotech stocks "play catch-up" and
news of product developments is released.
"The group is in its usual summer swoon, complicated by a series of product development
disappointments and by a number of companies reporting less than stellar second-quarter
performances," To writes. "As soon as the second-quarter earnings reporting season is over
and summer draws to a close, however, we believe the biotech group will perform better."
Fall traditionally is a better time of year for biotechs. Biotech stocks are driven by events,
such as release of trial data, signing of alliances with big pharmaceutical companies, and
filing for or receiving drug approvals.
A slew of key medical conferences takes place in the fall and reputable companies
generally release data from clinical trials or pre-clinical tests at the gatherings, or in
peer-reviewed publications timed to coincide with the conferences.
However, the sector could use an extra punch this fall, to offset lingering uneasiness from a
summer of setbacks for U.S. biotech vompanies at the U.S. Food & Drug Administration.
For example, in April, shares of AutoImmune Inc. (AIMM/Nasdaq) tumbled after the
company disclosed its multiple sclerosis therapy failed to outperform a placebo in clinical
trials.
In May, the FDA told Cephalon Inc. (CEPH/Nasdaq) more work was needed before the
agency would approve Myotrophin, its long-awaited Lou Gehrig's disease treatment.
There was one particularly ill-fated week in late June, when shares of Cambridge
Neuroscience Inc. (CNSI/Nasdaq) plummeted 60% in one day after the company halted
trials of its stroke treatment, saying further work needed to be done to establish its safety.
The next day, shares of Liposome Co. Inc. (LIPO/Nasdaq) sank 61%, erasing US$570
million of the New Jersey-based company's market capitalization, after tests showed its
respiratory drug failed to beat the placebo.
The troubles bear out an investing caveat analysts often cite: an estimated 75% of drugs
don't make it through all three phases of clinical trials.
They recommend picking companies that have more than one or two drugs in development
and that have well-designed clinical trials, solid management and a strong balance sheet.
But even well-established U.S. companies have endured criticism this year. Analysts point
to disappointing sales and earnings of some of the biggest biotechs, such as Amgen Inc.
(AMGN/Nasdaq) and Biogen Inc. (BGEN/Nasdaq).
"A lot of forecasts are coming home to roost now as products hit the market," says analyst Cameron Groome of First
Marathon Securities Ltd. "We see U.S. analysts scaling back forecasts by a dime a week as sales begin."
By contrast, no high-profile Canadian biotechs have had drugs blow up recently in clinical trials, although Hyal
Pharmaceuticals Corp. is still climbing back from its fall one year ago, when the company disclosed its clinical trial failed to
show its Hyanalgese D gel provided overnight pain relief to people with osteoarthritis.
Hyal's stock (HPC/TSE) had been trading at more than $10, but fell to $3.55 after the news. It has recovered somewhat,
closing at $4.75 yesterday, down 35›. Results of the gel's restaged trial are expected before the end of the year.
The Canadian sector has suffered more from lethargy than from any dramatic crisis. Some companies lost strategic partners,
while others found their choice of partner elicited only weak applause.
Many companies failed to meet self-imposed deadlines to start or complete drug trials or to sign partnerships with big
pharmaceutical companies.
For example, Hemosol Inc. (HML/TSE) had planned to start its phase 2 trial of the blood substitute Hemolink by the end of
last year, but didn't get under way until May.
In most cases, deals were eventually signed or partners found, but by the time they were announced, investors were
somewhat underwhelmed, analysts say.
"It's a rifle-shot market, which I prefer to the fever pitch of '95 and early '96," Groome says. "It's the type of market where
people don't want to buy [initial public offerings] but they probably should, because that's where the value is."
Minneapolis-based Piper Jaffray Inc. launched its coverage of the biotech industry with a report last month claiming the
sector had underperformed and was now undervalued.
Shortened FDA approval times for cancer and AIDS therapies, as well as an increase in partnerships between big
pharmaceutical companies and biotechs will bolster the market, analyst Peter Ginsberg says.
"Despite this optimism, we note that there are 299 public biotechnology companies, as well as roughly 1,000 private ones,"
he says. "So competition will be fierce and the majority will be unsuccessful. |
