nvestors See Biotech Rallying for a Second Year: Taking Stock
Bloomberg News
January 26, 1999, 2:16 p.m. ET
Investors See Biotech Rallying for a Second Year: Taking Stock
Scottsdale, Arizona, Jan. 26 (Bloomberg) -- Last year was a
pretty good year for biotech stocks as they ended a two-year
slump. And investors like Stephen Flaks expect medical
breakthroughs to send the group higher again this year.
Genentech Inc. introduced its breast cancer drug Herceptin
last year and Immunex Corp. offered Enbrel for arthritis. Sales
of Agouron Pharmaceuticals Inc.'s protease inhibitor for AIDS
Viracept and Biogen Inc.'s multiple sclerosis treatment Avonex
grew, making those two products the top sellers in their class.
The Nasdaq Biotech Index rose 44 percent last year, led by
Amgen, Biogen and Immunex, which together make up about half of
the capitalization-weighted index. Investors expect shares in big
biotech players to keep rising this year.
''This group is going to explode,'' said Flaks. ''I think I
have a shot for a 1995 (increase) again.'' That year, his fund
soared 404 percent, outperforming the Nasdaq Biotech Index's 88
percent gain.
The $70 million Flaks Partners biotech hedge fund gained 56
percent last year as earnings at bigger biotech companies rose,
while other businesses reported successes in trials of
experimental drugs and won their first drug approvals.
Investors expect sales of drugs like Avonex to keep growing.
They're also looking for about 10 biotechnology companies to
become profitable this year, starting with Immunex, whose gound-
breaking Enbrel treatment for rheumatoid arthritis won U.S.
approval in November. They're banking on money-losing firms like
Gilead Sciences Inc. and GelTex Pharmaceuticals Inc. to win
approval of experimental treatments for the flu and high
cholesterol.
Risk
Biotech shares remain among the riskiest and most volatile
in the market, however. Some 40 percent of the stocks in the
group fell more than 25 percent last year, even as the Nasdaq
Biotech Index soared, according to Kurt von Emster, a fund
manager with Franklin Templeton Group.
Such volatility has discouraged investors from delving
beyond the relatively comfortable territory of big drug companies
and large-cap biotech. They say it's harder to handicap the
earnings potential of smaller companies and right now many of
them are running short of cash.
Von Emster estimates that money-losing biotech companies,
some of which are years from bringing a product to market, need
to raise $5 billion to $8 billion within the next year and a
half. It's going to be tough to raise that cash.
''I don't think there is going to be a broad-based rally,''
said Michael Yellen, whose $500 million AIM-Global Health Care
Fund is banking on established names like Amgen, the world's
biggest biotech company.
Others, like Flaks, say that the advance this year will
extend beyond the big-name companies to include a handful of
smaller ones with products in development.
Lupus, Brain Tumors
He's betting that La Jolla Pharmaceutical Co. will rise this
year in anticipation of results of late-stage clinical trials for
its lead product -- a treatment for the inflammatory disease
lupus. Data from the study is likely to be released at the end of
1999 or early next year.
''This is one that's not on anybody's radar screen. The
stock looks cheap,'' Flaks said. La Jolla Pharmaceutical shares
were unchanged at 5 yesterday. They've gained 11 percent this
month.
Flaks also owns Neurocrine Biosciences Inc., which could
release data in the first half on a brain-tumor treatment that
could have fewer side effects than traditional chemotherapy
drugs.
And he's buying shares in CollaGenex Pharmaceuticals Inc., a
tiny money-losing biotech company whose stock has fallen 15
percent since Oct. 1, when it said it won approval of its first
product -- Periostat, a pill to treat gum disease. Flaks expects
the stock to take off as dentists become familiar with the drug.
Amgen
Other investors stick with better-known stocks such as
Amgen, which are heavily traded, making them easier to get and
out of. Amgen's shares have soared 30 percent since an unexpected
victory in a legal battle on Dec. 18. The company won full rights
to an extended release version of its blockbuster anemia drug
Epogen, a product that analysts say could become the company's
third drug with annual sales of $1 billion.
Amgen yesterday fell 7/16 to 114 3/16.
Laurence Blumberg, a biotechnology and medical technology
analyst for Alliance Capital, which manages some $241 billion,
lists Amgen among his top picks. He also likes other big biotech
companies, including Genentech and Biogen. ''They're going to
start selling at big-pharmaceutical multiples,'' Blumberg said.
The average of 10 big drugmakers tracked by Hambrecht &
Quist is trading for about 34 times estimated 1999 earnings.
Biogen is trading for about 31 times the average 1999 estimate of
First Call Corp., while Amgen is trading at 33 times that
forecast.
Another of Blumberg's top picks is GelTex, a money-losing
company that in November won U.S. approval to market Renagel
capsules to control blood phosphorus levels in patients with end-
stage renal disease.
Blumberg, whose firm owned about 24 percent of GelTex in
September, said the company could also sign partnership
agreements to develop two experimental treatments -- drugs that
lower cholesterol and fight obesity.
Immediate Gratification
Analysts say some of the best bets in the biotech world are
companies that either already have a product on the market or are
close to getting their first approvals.
''People are not going to wait two years for gratification
as long as they can buy Dell (Computer Corp.) and double their
money in a week,'' said Caroline Copithorne, an analyst with
Prudential Securities.
Her top picks for 1999 include Gilead, which will probably
seek U.S. approval this year of experimental drugs for AIDS and
the flu. She also likes Immune Response Corp. -- whose AIDS drug
Remune is in the final of three stages of clinical trials needed
for U.S. Food and Drug Administration approval and Inhale
Therapeutic Systems Inc., which is developing an inhaled form of
insulin with drugmaker Pfizer Inc.
Of course, any of these companies could encounter setbacks
as they bring products through the final stages of the demanding
FDA drug-approval process. And that could cause shares to tumble.
''Biotech to a large extent is a crapshoot,'' said Yellen of
the AIM-Global Health Care Fund.
--Jim Finkle in the San Francisco newsroom (415) 912-2996 with
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