How Long Can Biotech Stay In The Stratosphere?

Cynthia Robbins-Roth is a California-based consultant who makes her living by analyzing biotechnology companies. When a prominent biotech venture capitalist recently inquired about a company called Alteon, he had a simple question: What in heaven's name did it do? Although he had just bought 1,000 shares of Alteon stock on the advice of his broker, "he had never heard of them," says Robbins-Roth. But his ignorance was bliss -- for he had already doubled his money.

Welcome to the superhot -- some say overheated -- world of biotechnology stocks. Since the beginning of the year, companies on the cutting edge of biomedical research, in fields as diverse as AIDS and heart disease, have charmed Wall Street because of their growth prospects and resistance to economic malaise. The hottest segment, over-the-counter biotech stocks, has more than doubled in market valuation, according to Bridge Information Systems Inc.

But with stock prices rising to the heavens, the time for caution has arrived. True, short-selling of biotechnology stocks is likely to remain hazardous so long as the buying mania continues. But longtime biotech bull Jeffrey W. Casdin, an Oppenheimer & Co. analyst, says the time is ripe to "take some chips off the table."

OVERWROUGHT. The rally in biotech initially was led by the most solid biotech companies -- those that actually have sales and earnings, not just the promise thereof. A handful of established companies such as Amgen, Genzyme, and Chiron were fast joining industry pioneer Genentech in the ranks mf the profitable. But in recent months, the momentum has lured investors to more than a dozen second-tier companies, such as Synergen, Gensia Pharmaceuticals, T Cell Sciences, and Cytogen. Many such companies are two to five years from having significant sales and earnings, but their stocks have jumped to dizzying new heights anyway. Meanwhile, more than 30 small biotech companies have gone public this year, and other companies are heading back to the Street via secondary offerings.

Biotech investors are enraptured by the promise of future medical breakthroughs. Take Synergen Inc., based in Boulder, Colo. It is testing a drug called Antril against a range of diseases, including life-threatening infections and inflammatory conditions. Dazzled by the potentially huge markets for the drug, investors bid up Synergen shares from $11.50 to $59.88 this year. Companies working in AIDS research are even more beloved by Wall Street. The list includes MedImmune, Repligen, and, above all, Immune Response. That company's recent stock performance provides a jarring example of the jitters of an overwrought market. Analysts were predicting Immune could score a big payoff by 1994 on a promising AIDS vaccine, and fevered buying had sent the stock soaring twentyfold since the end of 1990. But on Nov. 12, a ruling by Washington regulators dashed the company's hopes for quick approval, pushing some estimates out at least another two years. The next day, the company's shares plummeted 26%. Synergen stock likewise fell 12% in two recent days because of bad news on one of its drugs.

EASY MONEY. While such stocks are undeniably speculative, the more than 30 young companies that launched initial public offerings this year are even more of a crapshoot. Some are simply too young to call: Seattle-based Icos, whose shares have gained 125% since they began trading in June, went public a scant 22 months after the company was established. It has a distinguished roster of scientists on the payroll but not a single drug on the market or in clinical trials. Then there is Alteon. Although the six-year-old company boasts an impressive crew of scientist founders, its first product, designed to treat diabetes complications, is only in early clinical tests. Yet on Nov. 1, the 31-person company raised $37.5 million in its IPO, the stock doubling in minutes.

Industry experts give much of the credit for this ongoing rally to the drawing power of Amgen Inc., the Thousand Oaks (Calif.) biotech giant. Amgen's two blockbuster products to treat anemia and immune suppression have helped give it a market valuation of more than $8 billion. These days, says Michael Murphy, who edits the Overpriced Stock Service newsletter, "if you want to lose a lot of money in biotech, short Amgen." But investors will get burned in what Murphy predicts as a "very nasty correction."

Until a correction comes, the companies that raise money while the window is open will enjoy a luxury their predecessors did not. Traditionally, much of the early-stage funding for biotech companies involved a measure of discipline: meeting goals and proving progress to sophisticated venture capitalists. Today's biotech investors have but one goal -- rising stock prices, fueled by hope for scientific advances. And Immune Response's shareholders can attest to this: When those hopes falter, stock prices deflate. Fast.

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