Promising Drugs Rejuvenate Biotechnology Stocks
Biotechnology is making a spirited comeback. But it’s suffered for so long that the industry and its investors have been asking themselves lately whether the revival will continue.
Following two years of lab disappointments and declining stocks, biotechnology is enjoying one of its best years ever - both in the research laboratory and on Wall Street.
Biotech scientists who manipulate genes and DNA hoping to treat some of medicine’s most fearsome maladies, have ticked off an impressive list of successful tests.
Hopes are high for Food and Drug Administration approval in the next year of breakthrough drugs for multiple sclerosis, AIDS-related cancer and blindness, and the fatal muscle degeneration called amyotrophic lateral sclerosis, or Lou Gehrig’s disease.
There’s even hope for a hormone that will some day stop people from getting fat.
Investors have rewarded the scientists by sending the stocks of their companies soaring at twice the rate of the broader stock market - up about 50 percent since Jan. 1.
New investment dollars, in the form of stock offerings and other financing, are flowing into the industry at a near record pace: $1.62 billion in the third quarter alone, according to the San Francisco research firm Burrill & Craves. That’s almost as much as the first three quarters of 1994 combined.
But analysts remain circumspect. They look at the still-young industry’s proclivity for boom and bust cycles. They also note with worry that biotech stock indexes peaked several weeks ago.
Because of the high costs of research, biotech has an insatiable need for new cash. Only about six of the 1,300 companies in the industry actually earn a profit, so a steady supply of new investors who are willing to wait for a payoff is critical.
Is a downturn coming again? It’s too soon to tell, but this year’s successes at least offer some hope for stability.
The first positive signs happened early in 1995, at the industry’s financial nadir.
“It had been a long time since the stock market had found biotech in favor and the conventional wisdom was the market was never going to come back,” said Marcia Kean, executive vice president of Feinstein Partners Inc. a Cambridge, Mass. investment research firm.
Analysts expected widespread buyouts, consolidation, even some bankruptcies.
While there were a few high profile acquisitions - for instance industry leader Amgen Inc.’s purchase of Synergen Inc., a company working on neurological drugs - the real reforms happened more subtly.
Large pharmaceutical companies, seeing their traditional chemical research pipelines lacking, scoured the biotech firms for those that had promise.
They took small stakes in biotechs and agreed to supply more money as research milestones were reached - but they let the biotechs stay independent to avoid stifling their entrepreneurship. In exchange, the biotechs gave their new partners the right to sell their new products.
“Money poured into biotechs from big (pharmaceutical companies) in the first half of the year to the tune of $2.5 billion, in effect identifying for the stock market where the valuable opportunities were,” said Kean.
Still, stocks rose only slightly, until June 12. On that day a West Chester, Pa. company named Cephalon Inc. unexpectedly reported that its drug Myotrophin was the first to slow Lou Gehrig’s disease.
In July, a biotech discovery had Americans dreaming of a cure for obesity after seeing pictures of grossly fat laboratory mice who had been turned svelte by injections with the genetically engineered hormone leptin.
Other research successes followed. There were failures too, but bullish-minded market players didn’t mind. Stock prices spiked upward.
So did the number of companies offering stock for the first time, as did secondary offerings of those who were already on the market.
Unlike previous biotech booms in the 1980s and early ‘90s, when many investors bought largely on hype and hope, it now appears a real acceleration of new product approvals is about to take place.
Among products to watch for in 1996 are Myotrophin, several new whooping cough vaccines; Avonex and Copaxone, the first drugs that slow down multiple sclerosis; and Doxil and DaunoXome to treat Kaposi’s Sarcoma, a form of cancer prevalent in AIDS patients.
Still, analysts worry that this optimism will prompt investors to snap up too many shares of weaker companies.
That could be a ticket to disaster for all the stocks if drug expectations aren’t met or if a general market decline hits.
Matthew Geller of Oppenheimer & Co. is worried about an oversupply of new stock issues. “My concern is that we’re printing so much new paper, when the momentum loses speed and people lose interest, who will bid for it?” he asks.
David Stone, a biotech analyst in Boston, said the current market plateau is a good sign.
“I take some comfort that we’re getting a pause in stock prices, that investors will now focus on individual stocks and not just play the group momentum,” he said.
xxxx LAB RESULTS WORK LIKE BOOSTER SHOTS A sampling of biotech research milestones this year: Leptin, a hormone, turns overweight mice lean and healthy, researchers reported in July. Amgen Inc. said tests on people may begin in a year. Cephalon Inc. reported in June that its drug Myotrophin was the first to slow amyotrophic lateral sclerosis, also known as Lou Gehrig’s disease. An FDA committee said in September it would consider final approval of Avonex, by Biogen Inc. as the first drug to slow the progression of multiple sclerosis. Guilford Pharmaceuticals Inc. said in April that the drug Gliadel prolonged the lives of brain cancer patients without debilitating side effects. New whooping cough vaccines by SmithKline Beecham, Connaught Laboratories and Chiron Corp. were 85 percent effective, with fewer side effects of existing vaccines such as fever and rashes, European tests showed in July. Gilead Sciences Inc. said in September that its drug Vistide delays the onset of the eye disease cytomegalovirus retinitis, a common affliction of AIDS patients. The FDA said it will likely approve two drugs to treat Kaposi’s Sarcoma, a form of cancer prevalent in AIDS patients. The drugs are Doxil by Sequus Pharmaceuticals Inc. and DaunoXome by NeXstar Pharmaceuticals Inc.