Move Over, Dot Coms. Biotech Is Back

With identification of the human genome almost done, investors and Big Pharma want in

Since he founded the Carlsbad (Calif.) biotech company Invitrogen Corp. in 1988, Chief Executive Lyle C. Turner has given his business spiel at dozens of investor meetings. "Usually, about seven people would show up," he says. Not anymore. When Turner spoke at a health-care conference in San Francisco in January, it was standing-room only, "with at least 300 people in the room," he says. To Turner, that's proof that a new generation of investors is discovering biotechnology. And for many, it's love at first sight.

For anyone with a long memory, this spectacle is a little unnerving. Champagne corks were popping like crazy back in 1990 as biotech stocks soared. But within a year, the party was over, and investors were swooning at their losses. The hangover lasted much of the decade.

This kind of thing could happen again. But most biotech analysts believe that this time around, the industry is on safer ground. Unlike highfliers of a decade ago, today's top players have medicines on the market, profits in the bank, and new drugs in the pipeline. "The companies that survived the sorting cycle are real companies with real products," says Dennis Purcell, chief health-care analyst for Chase Hambrecht & Quist.

The stock market certainly believes that. From Jan. 1 to Feb. 18, the American Stock Exchange's biotech index shot up 74%, to an all-time high of 679.4, while most other indexes were taking a bath. Venture capitalists poured more than a billion dollars into the sector in 1999. And the market capitalization for the industry grew from $97 billion at the end of 1998 to $350 billion as of mid-February, estimates Scott Morrison, a biotech analyst at Ernst & Young. He expects 25 to 30 companies to go public in 2000. "Depending on how long the rally lasts, biotech financing could be well north of $12 billion this year," says Morrison.

Many underground streams are feeding this biotech gusher. Huge amounts of money are sloshing around as a result of angst in the dot-com domain, and newly profitable biotech companies are catching a lot of the run-off. The sector has also gotten a boost from blockbuster medicines with solid pedigrees in scientific advances. And there are more breakthroughs where those came from. Plus, there's a hungry pharmaceutical industry that sees alliances with biotech pioneers as its best hope for sustaining innovation.

On top of all that, many investors think biotech stocks will leap to a new plane when researchers announce that they have deciphered the human genome--all 3 billion building blocks of the human genetic code. That thunderclap may be imminent. Celera Genomics Group, a Rockville (Md.) genomics company founded by gene-sequencing wizard J. Craig Venter, says it expects to have a rough draft of the entire human genome by midsummer. With the blueprint of humanity finally in their hands, scientists say it will become much easier to develop novel medicines that are safer and more effective than anything currently on the market.

In advance of its announcement, Celera's stock has soared 337% since early December--and it's not alone. Shares of the leading genomics companies, which focus on mining the human genome for new disease targets, are up as much as 1,500% from their 52-week lows. Six months ago, the entire genomics sector had a market capitalization of less than $5 billion. Now, Millennium Pharmaceuticals Inc., one of the leaders, is worth more than that by itself.

Current prices may seem lofty. But some investors feel the same about biotech stocks as they do about the Internet. "People have learned that you can ride the wave of momentum and not pay attention to valuations," says Samuel W. Murphy III, a vice-president and securities analyst at American Express Financial Corp. "Most people feel you have to participate in the biotech arena in order to perform up to snuff with the market."

That said, Murphy and other analysts are also sounding some warnings. They concede that genomics and other new technologies promise to revolutionize medicine and the treatment of chronic disease. But the techniques are still largely untested, and the payoff could be many years away. For that reason, Murphy divides the biotech market into two camps: In one are the companies with marketable products and deep pipelines. In the other are smaller companies with wonderful technologies but more questionable business plans--including most of the genomics gang. Eric M. Hecht, an analyst at Merrill Lynch & Co., seconds that viewpoint. "People need to remember just how long it takes to do something novel that will actually translate into good cash flow," says Hecht.

The latest rally has its roots in 1998, when biotechnology's blue chips--Amgen, Biogen, and Genentech--began climbing back toward their 1991 highs. By the fourth quarter of last year, the stock prices of midsize companies were recovering, and even the smaller companies were taking off. Tiny Ariad Pharmaceuticals Inc., a gene-therapy company in Boston, traded at 50 cents a share four months ago. Now, it's hovering around $16.

MARKET-READY. It's companies with commercial products, however, that are giving this rally its legs. When the sector set records and then tanked in 1991, only the fittest biotechs and their CEOs survived. The lesson is "what doesn't kill you makes you strong," says Julia G. Levy, chief executive of QLT PhotoTherapeutics Inc., a Canadian company that is about to win approval from the Food & Drug Administration for a potential blockbuster, Visudyne, that treats macular degeneration, a leading cause of blindness. "When you are short on money and investors aren't interested, you have no choice but to focus on the fundamentals," she says.

That means sound financials in addition to solid science, and lots of companies have them. Analysts at OrbiMed Advisors counted 17 profitable biotech companies in 1999--something unheard of in the early 1990s. That group should grow to 22 this year, and to 50 by 2002, as today's rising stars--which include Enzon, Millennium Pharmaceuticals, and Abgenix--join the ranks. There are now more than 350 biotech drugs in human clinical trials and more than 100 on the market.

Some of those are blowing analysts away. Amgen Inc. currently has two products on the market: Epogen for anemia and Neupogen for cancer. Together, they generated more than $2 billion in sales last year. Genentech Inc.'s Herceptin, approved in 1998 for metastatic breast cancer, racked up estimated sales of $190 million in 1999. Meanwhile, sales of Idec Pharmaceuticals' Rituxan for lymphoma, MedImmune's Synagis for respiratory infections, and Immunex' arthritis drug Enbrel have all exceeded Wall Street's expectations. The stock prices of these companies reflect that success: Since October, Immunex' share price has nearly quadrupled.

The parade of new products is being led by monoclonal antibodies. These are Y-shaped proteins that, like tiny divining rods, hunt down diseased cells and disable them. Many of the top moneymaking therapies, including Rituxan, Herceptin, and Synagis, are monoclonal antibodies. These drugs have the potential to treat an enormous range of diseases, from cancer to heart disease and arthritis, with fewer side effects than traditional medicines. And many more are coming. "You can go from gene discovery to therapeutic candidate in just a few months," says R. Scott Greer, founder and CEO of Abgenix, an up-and-coming antibody company in Foster City, Calif. According to the Pharmaceutical Research & Manufacturers Assn., 20% of all biopharmaceuticals in development in 1998 were monoclonal antibodies. Analysts believe that a decade from now, there could be more than 100 monoclonals on the market--up from 8 today--with revenues estimated at upwards of $50 billion.

This is not an overnight success story. Researchers spent more than 20 years doing the underlying work that led to the arrival of monoclonal antibodies in the marketplace. The first monoclonals were produced in mice because that was comparatively easy to do. But those drugs triggered rejection from human patients' immune systems, which recognized them as foreign proteins. The result was that patients who received them often suffered life-threatening immune reactions. One after another, antibodies failed to get FDA approval. By the early '90s, these hoped-for "magic bullets" were magic busts.

MAN-MOUSE BLENDS. Back in the lab, scientists reengineered the antibodies to look more familiar by replacing at least half of the mouse DNA with DNA from humans. The first of these "humanized antibodies" to reach the market, in 1994, was Centocor Inc.'s ReoPro, a clot-busting drug that reduces the risk of death during the coronary procedure angioplasty by 57%. ReoPro, which is half-mouse, half-human, is a low-tech antibody by current standards. Genentech's Herceptin, which came to market four years later, is 5% mouse, 95% human. And better versions are on the way.

Scientists at Abgenix and Medarex Inc. in Annandale, N.J., have come up with novel ways to make antibodies that are 100% human. Instead of engineering mouse antibodies to be more human, the companies have engineered strains of mice with what are essentially human immune systems. The technology has become wildly popular. Abgenix has signed 17 deals to develop antibody products for major pharmaceutical and biotech companies. Medarex has signed up 15. Even though there is no clinical proof that the antibodies being developed by Abgenix and Medarex work better than other kinds, investors are scrambling to grab a piece of the action. Six months ago, Abgenix' shares were hovering around $50. They were above $250 as of Feb. 18. The company recently completed the largest secondary stock offering ever for a biotech company--$630 million.

Another difference between the biotechnology companies of today and those of the past is the disappearance of one-drug, one-technology companies. Research pipelines are overflowing, thanks in part to new information streaming out of the human genome. Vertex Pharmaceuticals Inc., which developed the HIV drug Agenerase, has eight more medicines in clinical trials in partnerships with big drugmakers. Amgen hopes to launch four products in the next three years. One of them, NESP--a long-acting version of its anemia drug Epogen--has the potential to make deep inroads into Johnson & Johnson's $2 billion-dollar Procrit market.

Once the human genome has been completely sequenced, scientists will have hundreds of thousands of new targets they can use to create new drugs. Because these drugs will be based on more complete biological information, scientists assume they will be less toxic and more effective. Safety also will increase when it becomes possible to personalize medicine. Scientists are trying to match an individual's genetic variations with his or her ability to respond to a given medication. That kind of knowledge will let physicians customize therapies so that patients receive only those drugs that will help them.

The quest to mine the human genome for its unknown treasures will almost certainly lead to better medicines in the future. "Genomics is real. In the end, I am sure its promise will materialize," says Jurgen Drews, former president for global research at Hoffmann-La Roche Inc. and author of the book In Quest of Tomorrow's Medicines.

With a better understanding of the human genome in hand, researchers also believe they can get their hands on the critical drug targets faster. Millennium, which has taken just six years to blossom from a private endeavor into a corporation with 1,000 employees, has six molecules in human trials. Human Genome Sciences Inc., another leader in the field, has three. One of its products, a protein that speeds wound-healing and reduces scarring, is in late-stage clinical trials.

But mining the genome for targets and actually making money from the process are two very different things. If genomics companies are going to live up to their current high market valuations, they'll to have to show that they can deliver effective, safe drugs. "Data is king," says Chase Hambrecht & Quist analyst Robert J. Olan. "The long-term winners will generate it, interpret it, and apply it efficiently" to create first-class health care.

If there's a lesson to be learned from monoclonal antibodies, it's that many of the first genomic drugs are likely to fail. These early products won't benefit from the rigorous and intelligent new testing procedures that are being conceived daily. But a few of them will pass, and the companies that produce them may end up becoming pharmaceutical giants in their own right. One thing is certain: The science will advance. The biotechnology story has just begun.

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