To all - WSJ article on biotechnology.
January 5, 1999
Biotech Investor Shares Dreams,
Frustrations of Little Companies
By RALPH T. KING JR.
Staff Reporter of THE WALL STREET JOURNAL
SUNNYVALE, Calif. -- "I'm about to jump off the roof," the investor says.
The investor is Gerald Larson, and there is a reason for his rather extreme
sentiment. He is a biotechnology investor.
The stock market was up 23.43% last year, as
measured by the broad Wilshire 5000 index, and
more than 16% a year, on average, for the previous
dozen years. Mr. Larson could have profited fully
from that, having inherited a nice nest egg in the
1980s. But he followed one of the sweetest siren
songs ever to waft through Wall Street: the promise
of fabulous genetically engineered breakthroughs,
followed by fabulous stock-market riches.
Many an investor has followed that lure for a year or
two, giving up quietly after enduring just too much
disappointment. The stocks they finally relinquish
have names like Alteon, Amylin, Cephalon,
Immulogic, Xoma -- little companies based on
brilliant-sounding ideas and staffed with brilliant scientists, but with never quite
enough money, and luck, to turn their dreams to reality.
Now and then one of them breaks through to fortune, as Amgen, for instance,
did. Indeed, a few established biotechs with actual earnings and some size have
turned in stellar stock-market performances of late. The shares of Amgen and
Biogen, which have drugs for sale, roughly doubled last year, behaving more
like pharmaceutical stocks. But for every biotech that breaks out, there are
dozens upon dozens that muddle along -- inadequately capitalized, giving
convincing and even inspiring explanations of their science, but then having to
cull another project every so often to make their dwindling money stretch
further.
At the annual meetings of these little companies, chairs stand empty,
doughnuts go uneaten. Few securities analysts show up. Yet like die-hard fans
of the Chicago Cubs, a coterie of immensely knowledgeable and long-suffering
supporters keep coming to the game. Among them are investment pros like Liz
Greetham of Weiss Peck & Greer, an investment manager, and Nicholas
Metcalf of Newburyport, Mass., an independent investor, who sometimes
writes reports about the biotech companies he visits and sends them to his
friends. "Some say it's an exercise in masochism, but I don't like to quit once I
start something," Mr. Metcalf says.
Mr. Larson, 67 years old, knows both the loyalty and the exasperation. His
facetious threat to take leave of his rooftop came last Aug. 26, after he had
spent 10 months watching his biotech portfolio shrivel from $1.3 million to
about half that. Let's pick up the story there.
A Little Early
By the end of August, a rough month for the market in general, most of the 16
small stocks Mr. Larson owns are trading at or near their all-time lows. "Either
I'm really ahead of my time or I'm so damned dumb that I can't even hold my
head up," he says, swilling from a can of Diet Slice.
At his three-bedroom tract home, Mr. Larson opens a closet and starts pulling
out T-shirts given him by biotech companies. "Molecular Genetics ... Ingene ...
never heard of them, did you? Integrated Genetics ... Glycomed ... gone," he
says. There are 53 of them. Each has, or had, a different dream of the magic
that the science of genetic engineering could conjure, from agriculture and
diagnostics to wound healing and water treatment.
One company hoped to keep ice cream from crystallizing by using the genes of
arctic fish. Another tried in vain to outsmart the destructive corn borer. "I
thought ag was going to be the biggest thing I ever saw. I owned everything I
could find. It just bogged down somehow. I don't know," he says, closing the
closet door.
Three days later, on Monday, Aug. 31, Mr. Larson regains his gusto. He places
a $172,000 order for more shares of Axys, Isis, Xoma and four others, plus a
genetherapy company he hasn't tried before, Cell Genesys. He borrows the
money against his Charles Schwab account, incurring debt for the first time
since 1986, when, having retired from his job as a purchasing manager at Ford
Motor Co., he began his biotech adventure.
Mr. Larson doesn't have everything riding on biotech. He inherited a small
apartment building and some blue-chip stocks, worth about $1.5 million
altogether. He still owns some such stocks, but he readily admits he would
have millions more today had he stuck with blue chips instead of the more than
100 biotechs he has at various times owned.
His biotech portfolio cratered twice before, in 1989 and 1995. The stocks
roared back in 1991, biotech's banner year, and again in 1996. But they never
came close to matching the overall stock market's romp. His records aren't
complete, but by his own rough calculation, his return has averaged no more
than 5% a year, during one of the greatest bull markets in history.
Mr. Larson is expert in what his companies do. Medical and biological terms
like "glucocerebrosidase" trip off his tongue as he explains the novel treatment
one company is working on. His file drawers bulge with company documents
and technical publications. In one corner are boxes of taped conference
presentations by biotech executives, which he listens to over and over. He
constantly updates a ranking of companies using a 13-way scoring system he
devised.
"This is the best buying opportunity I've seen in biotech in 14 years," Mr.
Larson says. "If people buy now, they are going to thank God they did."
At the close of trading that day, his portfolio is down 12%, or $103,000.
But there is reason to smile: A note arrives from an idol, George Rathmann, the
former chairman of Amgen. Mr. Larson made $70,000 over 14 years from a
$500 Amgen stake, his biggest score by far in percentage terms, thanks to
Amgen's two blockbuster drugs. When Mr. Rathmann left Amgen to run Icos,
Mr. Larson bought shares and visited the company, chatting briefly with Mr.
Rathmann. The note thanks him for stopping by.
Also in the mail is a blue sweatshirt from Alteon. The company is grateful for a
tip Mr. Larson provided about a coming small-investor conference. Susan
Pietropaolo, Alteon's investor contact, is someone Mr. Larson talks to every
week or so. "I know where she went to school, the ages of her kids. It's really
a friendship," he says. He has relationships like that at lots of little biotech
companies.
His fixation has a personal side as well. "This industry is going to turn health
around," says Mr. Larson, who has diabetes. Alteon is developing a drug to
treat complications from diabetes. Another holding, Anergen, has a drug that
may prevent some symptoms of the disorder.
"That's a big drug. Every diabetic in the world will take it," Mr. Larson says.
A week passes and the value of Mr. Larson's portfolio bounces back up
$164,000.
But now he is miffed. Hopes for a get-acquainted session at his newest
holding, Cell Genesys, fizzle. The investor-relations person didn't call back, he
says. He needs these visits to take a company's pulse. In biotech, the people
matter, he says.
Straight to the Top
He arranges a visit, his second, to Axys, of which he owns 20,000 shares, an
investment of $170,000. The holding has been underwater almost from the
start. Yet he considers Axys's CEO, John Walker, "one of the finest managers
in the industry," adding, "All I can tell you is John has a plan."
Driving to Axys in South San Francisco two weeks later, Mr. Larson says his
portfolio's rebound continues, up $242,000 from the Aug. 31 trough. The
Axys chief spends more than an hour with his visitor, meeting in the
boardroom. He describes his creation of the "broadest, deepest technology
platform in small-molecule development." He answers Mr. Larson's detailed
questions and smiles at the suggestion that Axys publicize its accomplishments
more. A steady stream of press releases might be nice, but drug development
is slow, and "news flow" basically stops during clinical trials. Axys began
work on its lead drug, an inhaled form of tryptase for asthma, in 1992, yet
critical human-test results won't be out for another year. Still, "we've got proof
that tryptase works," Mr. Walker says, predicting the drug will help turn the
company profitable in 2002.
Mr. Larson is pleased. "If Axys goes nowhere for two years, I'm OK because
it's out there. It's going to happen."
Eight days later, on Sept. 29, Axys announces that it is halting development of
inhaled tryptase. It turns out to aggravate patients' coughing. The company will
continue to pursue tryptase in other forms, but the stock plunges 19%. The
value of Mr. Larson's holding sinks $17,500.
"I'm not going to sell because I have a ton of faith in the company," he says.
Two days later, another of his stocks, Icos, has some good news. Eli Lilly is
investing millions to help develop Icos's drug for erectile dysfunction. Yet Icos
shares don't budge. "It's perverse," Mr. Larson says, a little depressed.
A Nice Bounce
Then, through October and into November, Mr. Larson's luck dramatically
improves. His portfolio soars above $1.2 million in value, a gain of $476,000
from its low point. Much of that reflects a doubling in one stock, Agouron,
which is seeing strong sales of its drug for HIV and is about to begin clinical
trials of one for the common cold. "If Agouron does an Amgen, it'll be worth
more than $4 million," he says of his $400,000 stake in the company. "But I'm
not being greedy. I'll take a quarter of an Amgen."
Then, another blindside. Mr. Larson awakens at 4:30 a.m. on a mid-November
day to the sound of his fax machine. He leaps out of bed to learn that Alteon,
the company that sent him the sweater, has bombed in the final phase of
testing with its drug for diabetes complications. After the shock wears off, Mr.
Larson dumps it, taking a $37,500 loss.
He decides it is time to unwind the worrisome $160,000 margin debt, which
has already cost him $2,800 in interest. He sells six of his least-promising
stocks, including Anergen, which is fast deflating. To offset accumulated
losses, he also sells 1,000 prized shares of Agouron. By December, most of his
10 remaining stocks, including Agouron, have continued to climb. Even with
some stocks gone, his biotech portfolio is back up to around $1.2 million. It's
the kind of rebound after a punishing year that keeps Mr. Larson coming back
for more. "I won't give up," he says. "At some point in history, biotech is
going to be the biggest thing around. I believe in my heart that my portfolio in
the next five years will be worth $5 million."
In a demonstration of his faith, he buys a $47,000 BMW M Roadster. He
hadn't bought a new car since 1965, when he got a Volkswagen Beetle, which
he drove for 30 years.
"If Alteon had worked, I would have had three new cars," he says.
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