Why Biotech Stocks May Be Sick For A WhileJoan O'C. Hamilton
Bothell, Wash., is a long way from Wall Street. But for small, public biotech companies these days, there is nowhere to hide from shell-shocked investors. Just ask Janice M. LeCocq, chief financial officer for Bothell-based Icos Corp., who is now fielding a half-dozen telephone calls every day from anxious investors asking for news of a product that would boost the company's stock price. Shares of Icos are trading at around 9 these days, down from their 52-week high of 21.
Investors, wowed by the metaphysics of biotechnology in 1991, are now grappling with Newton's law of gravity. Last year was one of astounding, at times even irrational, popularity for the gene jocks: Many key biotech stocks more than doubled in price. Even savvy investors who questioned a company's prospects at 15, suddenly couldn't buy enough shares at 40. Since January, though, the stocks as a group are off about 35% in an otherwise up market (chart). "What we had was pure and simply a correction from speculative excess," says Jeffrey W. Casdin, a biotech analyst with Oppenheimer & Co. He believes biotech has further to drop. Hambrecht & Quist Inc. bio-stock watcher Jacqueline G. Siegel says many of her institutional clients have abandoned the sector altogether. Says Siegel: "It's going to take very selective investing to make money."
SELLING PRESSURE. Biotech stocks have often suffered these sudden nosedives. Typically, they are triggered by a leading company's spectacular bellyflop. The last was in 1988, after longtime highflier Genentech Inc. brought out TPA, a widely heralded drug for heart attack patients. Its disappointing sales sent biotech stocks into a two-year spell of malaise.
This recent sell-off is a bit more complex. Broad market trends resulting from hopes for an economic recovery are partly to blame. In January, investors began taking profits in their biotech portfolios and shifting to cyclicals, which traditionally do well during a recovery. Another factor: The flood of mid-1991 biotech stock offerings included provisos that inside investors couldn't sell their shares for six months. Those began expiring just recently, creating more selling pressure.
Then, true to history, a leading company's fall touched off broader selling. On Apr. 16, Centocor Inc. announced a regulatory setback: The imminent approval everyone expected for its infection-fighting drug HA-1A, or Centoxin, wasn't going to happen. The Food & Drug Administration had doubts about its medical powers and wanted more research data. This news torpedoed the stock. After hitting a high of 60 last year, Centocor is now trading around 12. That news not only pulled other biotech stocks down, it also led to the shelving of several planned new issues.
The trouble for biotech companies is that they are now moving into a heavy research phase, when dazzling new products are scarce. Icos and other hot startups raised sizable war chests last year with the expressed goal of "lying in the weeds and getting the research done," says Icos' LeCocq. Wall Street does not expect any high-profile drug approvals until 1994. Investors get very restless when the only things coming out of the companies for a while are bleary-eyed scientists.
Prices may get some help from corporate buyouts. With many biotech stocks battered, analysts predict that a few big drug companies might go shopping--and pay tidy premiums. The Street is nursing rumors that Merck and Eli Lilly could be interested in Centocor. Neither Merck nor Lilly returned calls asking for comment, and Centocor says only that it is interested in a variety of "collaborations." It had better ink them fast, however: The company, which had revenues of $75 million in the past 12 months, is currently burning cash at the rate of $50 million per quarter.
SOME GOOD BUYS? The irony of the biotech plunge is that it seems so removed from the fundamentals of the industry. Never has biotech's promise been brighter: It is fast revolutionizing the drug industry. And a slew of exciting products from veteran companies such as Genentech, Chiron, and Biogen, as well as younger companies such as ImmuLogic, are in early stages but on track--and some of these kicked-around stocks may prove to be good buys now (table).
Yet for the time being, good news from biotech companies doesn't have its old impact. It takes a lot more to impress investors than it used to. Last year, a company that reported progress even in very early research saw its shares rise dramatically. The day before its May 5 announcement that it had won FDA approval for an anticancer agent called Proleukin, for example, shares of Chiron shot up by more than 6 points. But Chiron's stock is still 40% below its 52-week high.
During their recent popularity, biotech companies had hoped that, this time around, they were attracting long-term investors. Sorry. Any near-term revival for the biotech group will require a miracle drug.