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Biotech: A Coming Boom -- or Bust?

As 2003 unfolded, the biotech industry began to pull itself out of a big slump. A spate of new product approvals -- and promising results in clinical trials of experimental drugs -- helped lift the AMEX biotechnology index 67% by early June. But the sector is far from booming. Stock indexes have been flat since then, some new products have failed to live up to expectations, and most of the recent IPOs are trading below their original price.

Where the industry goes from here, analysts say, will depend how good the news is in 2004. Will there be lots of new drug approvals -- and robust sales -- along with more clinical-trial successes? Or will much of the news be bad, dragging down the whole sector?

No one knows the answers now, of course. Some analysts and industry experts are bullish, believing that companies' pipelines are full of promising drugs. Others are more pessimistic, fearing that the risks of development are so great that success will be elusive for many companies and drugs.

Who's right? Judge for yourself. Here are the differing thoughts of two biotech veterans. The optimistic view comes from Carl B. Feldbaum, president of the Biotechnology Industry Organization. The more pessimistic take is from Alan G. Walton, a prominent venture capitalist at Oxford General Partners, who has helped found many high-profile biotech companies. John Carey, BusinessWeek's Washington-based science correspondent, recently spoke with each of them. Edited excerpts of his conversations with them follow:


Q: How has the industry done this year?

Feldbaum: We had a big year. Last year, we were talking about ImClone (IMCL) [a startup whose cancer-drug application was rejected by the FDA and whose stock became embroiled in allegations of insider trading] and Martha Stewart [accused in the ImClone case].

This year, we're talking about 21 new biotech products, for some really important conditions. It has been beyond a recovery, it is quite a resurgence. And it has been totally performance-driven. This industry is based on its performance. It's nothing to do with hype, nothing to do with publicity, nothing other than our ability to get an enormous pipeline of promising products for unmet medical needs through the FDA.

Q: What you do expect for 2004?

Feldbaum: I never predict. But we have the richest, deepest pipeline ever. There's going to be an unprecedented number of biotech drugs being approved, [which will] make new companies and build up old ones.

We represent 1,100 companies. Right now, probably only 100 have drugs on the market. The others are doing research and development for unmet biomedical needs. They're not trying to develop the fourth or fifth beta-blocker, for example. They're really attacking important diseases. This is pretty positive.

Q: Will the new Medicare bill have an impact?

Feldbaum: It's enormously positive in terms of spurring innovation. The reimbursement regime is more reliable and predictable. Many if not most biotech companies are developing drugs for diseases of aging, like cancer, Alzheimer's, Parkinson's, and osteoporosis. So this bill, by providing a drug benefit, could be enormously helpful in stabilizing access and reimbursement for biotech products.


Q: Even though biotech stocks jumped 67% in the spring of 2003, many private companies had to dramatically trim staff and expenses to survive. Only a few managed to go public and, in general, they're not doing very well. What's going on?

Walton: I think that if there's going to be a strong IPO market, it's not going to evolve until next fall. What we've seen so far is a mini-ripple. It may be the total ripple. People want to see what happens at the Hambrecht & Quist conference [in January] to know whether or not they come out alive or dead. By the end of January, we should know if this will be a hot year or pretty dreadful.

If there's no IPO market, we'll see mayhem. So many companies are spending huge sums of money on clinical trials and trying to stay alive -- and they may have to wait two or three years before there's an exit. People says there's lots of capital around, but there isn't that much. Companies couldn't afford the trials that were under way in 1994, and I don't think they will be able to afford them this time either. Everything is hanging in the balance -- balanced on a razor's edge.

Q: But if biotech companies can't afford to do all the trials necessary for FDA approval, can't they find a Big Pharma partner to shoulder the cost? Some analysts think that the biotech pipeline is full of promising drugs that should be attractive to the pharmaceutical companies.

Walton: Everything out there in Phase III has been picked over by 500 companies, and it's not very exciting. I'm told by Big Pharma that there are five compounds in good shape in the biotech industry. Everyone wants them, but the companies won't sell.

Q: You don't sound very optimistic.

Walton: People say, "Alan, you're so pessimistic." But this is a very tough business. You can make a business out of biotech, but you can't make a fortune without luck and some whiz-bang technology.

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