Battered Biotechs Can't Get Past Paralysis at FDA
By Jerry Knight
Monday, July 15, 2002; Page E01
A batch of Washington's biggest and best biotechnology stocks hit new lows last week, sentenced to Wall Street's dungeon after being convicted of guilt by association.
Simply being in the industry is the main reason why MedImmune Inc., Human Genome Sciences Inc., Celera Genomics Group
and four other companies were sent to the biotech Bastille.
Besides that, biotechs are traded on the Nasdaq Stock Market, which has been on the road to perdition longer than Tom Hanks.
Biotechs also are part of the pharmaceutical family; most want to be drug companies when they grow up. The pharmas too are
targets -- of congressional efforts to hold down prescription drug prices. So far Congress has succeeded only in driving down
pharmaceutical-company stock prices, taking the biotechs with them.
Biotechs, too, suffer from association with, of all people, Martha Stewart.
Many people have forgotten by now that the Martha Stewart scandal is really about a biotech company called ImClone Systems.
She and other insiders dumped ImClone stock just before the company revealed an unfavorable decision from the Food and Drug
Administration on its cancer-fighting drug Erbitux.
Announced Dec. 30, the ImClone decision triggered a 33-point plunge in the Nasdaq Biotech Index, which has been sliding since.
ImClone was a biotech star until then, thanks to a $1 billion deal with Bristol-Myers Squibb Co., the most lucrative contract ever
between a baby biotech and a big drug company.
The fall of ImClone was not only a turning point for biotech stocks, but also a symbol of what many analysts believe is biotech's
nastiest negative: the Food and Drug Administration.
"The paramount problem is the FDA," said Nelson Campbell, head of health-care investment banking for Friedman, Billings,
Ramsey Group Inc. in Arlington.
Stocks of biotech companies, he said, "are priced right now as if no other drug is ever going to get approved by the FDA. That is
the major problem."
Biotech companies have 60 products in clinical trials, Campbell said, but the FDA recently has been responding to virtually all
new drug applications by asking the makers for more information, which can mean a year or more of additional work.
The bureaucratic stalling is blamed in biotech on the fact that after a year and a half in office, President Bush has yet to appoint
a commissioner to run the FDA. With no one at the top to take responsibility for tough decisions, bureaucrats do what comes
naturally: They duck, they defer, they don't.
The FDA vacancy may be doing as much damage to biotech stocks as the unfilled seats on the Securities and Exchange
Commission are doing to the overall market.
At a time when investor confidence is at an all time low, the SEC can barely muster a quorum. Two of the five seats are vacant.
Two more commissioners, Republican Cynthia A. Glassman and Democrat Isaac C. Hunt Jr., are serving under recess
appointments that expire when Congress adjourns for the year.
The only SEC member confirmed by the Senate is Chairman Harvey L. Pitt. He is so tainted by his intimacy with the accounting
industry that even the Wall Street Journal editorial page wants to get rid of him.
Wall Street needs five bulldogs today, not a lapdog and a pair of puppies on short leashes.
Left largely to protect themselves from corporate criminals, investors are very cautious about buying stocks, watching as the
markets drift lower, led by Nasdaq.
Biotech "is the whip end of the equity market," Campbell said. "Whatever trends are evident in the overall market will be more
evident in biotech." So with the Nasdaq Stock Market composite index down about 30 percent so far this year, the Nasdaq
biotech index is off 53 percent.
Many of the local biotechs are doing worse than that.
Only one of the dozen-and-a-half stocks is up for the year, United Therapeutics Corp. of Silver Spring, which in May won FDA
approval for its first product, Remodulin, a drug to treat pulmonary hypertension. With an 8 percent gain for the year, United
Therapeutics is not only the best-performing local biotech for the year, but one of the best in the entire industry.
Along with MedImmune, Human Genome Sciences and Celera, four other stocks also hit new lows for the year last Wednesday
when the stock market swooned: Digene Corp., EntreMed Inc., Gene Logic Inc. and Novavax Inc.
All are clearly being buried in the biotech bailout, though Novavax and MedImmune might have bottomed out under their own
weight because of developments last week.
Novavax shares, down 83 percent for the year, took their latest dive because of reports on a large-scale study of
hormone-replacement therapy for menopausal women. The study questioned the effectiveness and the safety of
hormone-replacement drugs, which generate billions of dollars a year for drug companies. Drug stocks sank, and so did most
biotechs.
Novavax aspires to get into menopause-remedy business and has been developing a hormone replacement cream called
Estrasorb. In April, the FDA refused to approve the product, dropping Novavax's share price to less than $6 a share from $12.
On news of the hormone-replacement study, it fell again, to $2.15 a share from $3.89, before rebounding to $2.40 at the end of
the week.
MedImmune also ran afoul of the FDA, which asked for further study of the company's nasal-spray flu vaccine FluMist. The
setback was no surprise to analysts and investors who follow MedImmune.
The market reaction, however, was not what might have been expected. MedImmune stock gained more than $3 on Thursday.
Part of that was because of the broad market bounce-back from Wednesday's big loss. Most, however, was the result of short
covering: a temporary blip in stock prices that is produced when short sellers, speculating that a stock will fall, decide it's time to
cover their bets. Predictably, MedImmune went back down again Friday.
Short-selling has been a very profitable biotech strategy, said John T. McCamant, editor of the Medical Technology Stock Letter.
"You can make a lot of money if you bet against a biotech when it goes up to the FDA," McCamant lamented. Ultimately, he
predicted, MedImmune's drug will be approved. "We think FluMist looks like a very successful drug."
But, as FBR's Campbell pointed out, flu vaccines are seasonal products and FDA delays could mean missing an entire season's
sales. That would hold down MedImmune's stock price, because investors value biotech stocks by estimating not only how much
revenue the company will generate, but also when.
When biotech stocks will rebound is tough to estimate, McCamant said, because they have always been cyclical. "There can be
prolonged down periods, as long as a couple of years," he said.
In the long term, McCamant predicted, the makers of hormone-replacement drugs, battered so badly in the past week, will
rebound with a new generation of drugs designed to resolve the safety issues raised last week. But it could be two to four years
before the big pharmaceutical companies bring those products to market.
Besides the industry's own problems, such as the recalcitrant FDA, biotech stocks are bucking Wall Street fashion, McCamant
said. They are growth stocks and all growth stocks are out of favor, which is why the Nasdaq Stock Market composite index has
fallen much farther than the Dow Jones industrial average or the Standard & Poor's 500 stock index.
A biotech recovery "will be particularly difficult if the Nasdaq stocks stay down," McCamant said. "We don't expect to see major
rallies in biotech until Nasdaq recovers."
McCamant and Campbell agreed that appointing a new FDA commissioner and ending gridlock at that agency would help speed
a biotech recovery.
Campbell suggested that with biotech stocks so low, and the major pharmaceutical companies short on new products in their
development pipelines, biotech companies could become acquisition targets.
The "big pharmas," as both analysts called them, have not been as successful as small biotechs at developing novel drugs, so they
are likely to buy creativity. The drug companies remain rich enough to buy biotechs with either cash or stock.
When biotech stocks do turn back up, they could jump quickly, Campbell said. That's because there are so many short-sellers
making bets on biotech's continuing slump. The shorts have borrowed stock and sold it. To make a profit, they have to buy back
those shares at a low price to repay their borrowings.
An uptick would force the shorts to quickly cover their bets and could cause stock prices to spike.
That might be an opportunity for quick profits. And with biotech stocks approaching what sooner or later will be the bottom of
their cycle, there are probably good long-term investments to be made.
But not many people seem willing to get back into biotech yet, Campbell said. "I think investors are pretty much sitting on their
hands."
© 2002 The Washington Post Company |
