The Gene Machines Gear Down

A biotech bloodbath has companies making drastic changes

For more than a decade, scientists at French biotechnology company Transgène have searched for genes that could yield treatments for everything from muscular dystrophy to cardiovascular disease. But now some of them may be searching for new jobs. After Transgène's stock nose-dived 85% in six months, in late March the Nasdaq-listed company announced a radical shift in strategy, jettisoning most of its research efforts and focusing almost entirely on developing gene-based drugs to fight cancer. "We have to make sure that our research program is bringing new products into the pipeline," Chief Executive Gilles Bélanger says.

For European biotechnology companies, it's sink or swim. True, biotech stocks worldwide have been trampled in the stampede from technology shares. But the downturn has been especially painful in Europe, where the industry is much younger and more thinly capitalized than in the U.S. After outperforming the Nasdaq biotechnology index by 39% last year, shares of leading European biotech companies have plunged 22% since January. Some smaller biotechs, including many traded on Germany's Neuer Markt, fell much further. Cash is growing scarce: Transgène, which posted a $20 million loss in 2000 on sales of less than $4 million, has only enough to last it through the end of this year.

In hopes of jump-starting investment, Europe's biotech companies are homing in on products they can bring to the market quickly. Transgène is pushing ahead with its anticancer program, including vaccines that are already in the second stage of clinical trials. But it plans to sell off its cardiovascular research unit, which does not yet have any products in the pipeline. "The gene therapy field made a big mistake thinking there would be lots of successful products in a very short time," says Transgène's science chief, Margaret Liu.

It's a sharp reversal of fortune. Just a few months ago, European biotechs looked set to hit the big time. GeneScan in Germany, ReNeuron in Britain, and Actelion in Switzerland, among others, had successful initial public offerings last year. Many teamed up with big pharmaceutical companies on research. Venture-capital firms poured in millions more. And investors flocked to the European biotechs because their shares were cheaper than those of their U.S. counterparts.

But even at its peak last year, Europe's biotech sector had a market capitalization of around $95 billion--about one-fourth the level in the U.S. And only a handful of companies, such as Britain's Celltech Group PLC and Shire Pharmaceuticals Group PLC, were breaking even. When the biotech market began to sour, new money dried up fast. Transgène had to cancel a planned sale of shares in 2000 because of market weakness. It will try again at mid-year. Transgène has gotten some relief from its strategic turnabout. Its share price has rebounded 20% since mid-March.

RISKY MOVE. Genset, France's biggest biotech company, also is retooling. It is shifting from research partnerships with big pharmaceutical companies to developing its own drugs, including a possible treatment for obesity that could provide a steady revenue stream. And Sweden's Oxigene Inc. is selling off its genetic-testing business to concentrate on developing anticancer drugs.

But there's a risk for biotech companies that put all their research eggs in one basket. After narrowing its focus to anti-obesity research, Genset saw its stock tank this year from $40 per share to $10.90 after the abrupt resignation in February of the scientist spearheading the research. Genset quickly brought in a new scientific team, but its share price continued sliding, to $3.20. "They've gone from a big genomic play with 500 employees to a company which is developing just one molecule--and this molecule is still at the preclinical stage," says Denis Lucquin of Sofinnova Partners, a Paris venture-capital fund that was an early investor in Genset. The company isn't commenting. For Europe's biotechs, the pain may not be over.

By Carol Matlack in Paris

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