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Selective Healing in Biotech

By David Shook The biotech sector has created more grief than joy for investors recently. The AMEX Biotech Index is off 40% from the one-year high it hit in March, 2002. The sell-off has been triggered by a number of high-profile flops -- most notably ImClone's (IMCL) continuing failure to gain approval for its widely anticipated cancer drug, Erbitux.

The often-volatile sector should show signs of a recovery -- albeit a spotty one -- in 2003. The U.S. Food & Drug Administration could approve as many as 33 new drugs this year -- up from 17 in 2002, according to Viren Mehta, founder of Mehta Global Partners, a health-care investment-research outfit in New York. This may be a signal that biotech is on the mend. But the uncertainty over how many products ultimately earn an FDA green light is a reminder that the sector still contains as many land mines as buried treasures.

WANTED: A BIG IMPACT. The best way to approach biotech this year is with a simple rule: Look for companies with a truly innovative product, one that's likely to change the way patients are treated. While that might be an aim of all drugmakers, very few have novel, market-ready medications with the potential to make major impacts on the treatment of diseases. A survey of the sector uncovers a handful of promising biotechs in 2003.

Still-unprofitable Trimeris (TRMS) has a new HIV drug, Fuzeon, that experts say is a shoo-in for FDA approval this year. It attacks the virus in a new way and may be the best hope for the thousands of patients for whom cocktails of anti-AIDS drugs no longer restrain the virus.

The irony is that demand for Fuzeon will likely outstrip supply once the FDA approves it, a decision that could come soon. Trimeris and its partner, Swiss pharmaceutical giant Roche, have acknowledged that Fuzeon is tricky to make. As a result, they don't expect to meet the pent-up demand until they figure out how to boost manufacturing capacity.

Such a dilemma would be welcome at most biotechs. Analysts still expect Fuzeon to achieve sales of more than $100 million this year, perhaps $300 million in 2004, and they believe the figure will continue to climb after that. Two of the world's leading AIDS researchers manage Trimeris, giving it added credibility (see BW Online, 7/30/02, "In the Front Lines Against AIDS"). While Trimeris' stock is expensive, the supply issues have knocked 25% below its one-year high. It now trades at around $41, which could be a nice entry point.

ERRATIC BUT PROMISING. Another potential winner, Biogen (BGEN), might be characterized as an old dog with a new trick. This stock isn't for the weak-hearted. One of the few outfits in the industry to have posted significant profit growth over several years, it has been one of the sector's most erratic performers. It isn't uncommon for a minor news event to move Biogen's stock 10% in a single day.

The volatility stems from Biogen's one-hit-wonder status. Its value has been built almost entirely on Avonex, the gold standard in multiple-sclerosis treatment. Last year, the product chalked up nearly $1 billion in worldwide sales. Yet Biogen now has competition in the MS market from rival Serono, a Swiss biotech that makes a drug called Rebif. As a result, Biogen's stock has tumbled to around $39, down some 32% from its 52-week high.

Nevertheless, Biogen now has an answer to Avonex's decline: Amevive, a treatment for psoriasis that could give dermatologists a new weapon against a chronic skin disease for which few treatment options exist (see BW Online, 5/16/02, "Biogen Could Use This Shot in the Arm".) The drug gained FDA approval in January.

Although Biogen will have competition in the psoriasis market from rival Amgen (AMGN), Amevive could ultimately generate as much as $500 million in annual sales, analysts believe. Furthermore, Biogen stock could continue a rebound that began following Amevive's Jan. 30 FDA approval. Says Jason Kantor, W.R. Hambrecht & Co. analyst: "We believe that Amevive has the potential to be a blockbuster."

HEARTENING RESULTS. If Biogen has new legs, Scios (SCIO) is just getting them. The December issue of American Heart Journal reported results of a follow-up study suggesting that Scios' Natrecor is indeed a safe and effective treatment for patients with congestive heart failure (CHF) -- the chronic conditions associated with living with a diseased heart.

Analyst Mark Monane of investment bank Needham & Co. points out that Natrecor is the first new treatment in 10 years for CHF, for which an estimated 1 million people seek treatment each year. Natrecor is also a considerable improvement over the existing standard: nitroglycerin. Thanks to this drug, says Monane, "We think Scios may be profitable by the end of this year or the beginning of next."

Analysts estimate that Natrecor sales could break $100 million in 2003 and eventually reach $400 million annually. If the product, which gained FDA approval in 2001, continues to surprise on the upside, the stock could hit new highs, Monane believes. Scios trades at around $31.50 a share, up about 20% in the past year.

RECOVERING STOCK. Not every stock can claim high praise from Wall Street, but that doesn't mean it can't rebound. Intermune (ITMN) fell 20% on Jan. 7 after it announced bad news about its flagship product, Actimmune, a protein that stimulates the immune system.

The drug was initially approved in 1990 and is used for two rare illnesses, but Intermune was also planning to use it for treating a third illness, idiopathic pulmonary fibrosis (IPF), a fatal lung disease for which no effective treatments exist. The latest studies showed that Actimmune may not be as effective as Intermune had hoped. As a result, its stock has taken a bad beating -- down 61% from a one-year high of $46.

However, the clinical studies had a silver lining, says Libbe Englander, partner at BioPharma Capital in New York. "The trial did demonstrate that patients on the drug were actually surviving longer than those without it," she says. And because no alternative treatments are available, Englander thinks doctors will keep using Actimmune in the hope that it may prolong IPF patients' lives. "At the stock's current price [of around $17.80 a share] it seems reasonable to assume that it's undervalued if doctors continue to prescribe the drug," Englander says.

A WHOLE MEDICINE CABINET. Certainly, biotech doesn't offer any sure bets. And these aren't the only stocks that analysts and biotech-fund managers have been eyeing. Names to watch include Gilead Sciences (GILD), now consistently profitable thanks to a fast-growing product for HIV and AIDS; Idec Pharmaceuticals (IDPH), a cancer-research concern whose antibody-based drugs are being widely used by oncologists; and BioMarin (BMRN), whose treatment for a rare heart and lung disease could gain FDA approval in the coming weeks or months.

About the only certain thing at this point is that biotech's fundamentals are more favorable than they were a year ago, says Michael Sjostrom, chief investment officer at Sectoral Asset Management in Montreal. He says the larger number of high-impact drugs expected to win FDA approvals this year should make the sector more inviting to investors.

If the predictions are right -- and nearly twice as many drugs debut in 2003 than was the case last year -- then investors are likely to find at least a little joy in this risk-laden sector. Shook covers biotechnology issues for BusinessWeek Online. Follow The Biotech Beat every week, only on BusinessWeek Online

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