Big Trouble in Biotech City?

Don't count on it. Despite the slew of bad news, Big Pharma's need for new drugs is just one of many fuels for the industry

By Amy Tsao

In the past four weeks not one, not two, but nine separate biotech companies have made negative announcements. The string of bad news has many investors fretting over the industry's health and serves as a painful reminder of how risky it can be to invest in the sector. Even though the biotech business is now some 30 years old and many outfits have proven themselves true successes, company-specific misfortunes can still play a big hand in dampening sentiment for the entire group.

The parade of drug failures, setbacks, and negative Food & Drug Administration decisions began with ImClone (IMCL ), a company working on one of the most promising areas in cancer research. On Dec. 28, ImClone announced that the FDA would not review the application for its highly anticipated cancer drug Erbitux. To many, ImClone's inability to even get the drug looked at by the FDA was a confidence-shaking event.

After all, the $2 billion pact Imclone signed with marketing partner Bristol-Myers Squibb in the fall of 2001 had offered "a sign that biotech had really arrived," says Ed Saltzman, president and founder of Defined Health, a pharmaceutical and biotech strategy consulting firm. But "we went from being valued as an industry that has really grown up, as sophisticated, to looking like neophytes," he says.


  Trouble in Bio-City? Not so fast. The long view looks good for the industry, and even this year could see a turnaround in no time. "In the end, this comes down to a game of who's got the products," Saltzman says. Even with all the misses so early in the year, some promising developments are bound to happen during the year. A few positive headlines on the status of clinical trials or FDA decisions could get the industry back on track just as quickly as it was derailed.

Investors could get excited if Eli Lilly (LLY ) and Icos (ICOS ) get FDA approval this year for Cialis, their impotence drug. Medimmune (MEDI ) and Aviron (AVIR ) are waiting for a decision on their nasal-spray flu vaccine this spring. Positive clinical data reported at medical conferences as the year progresses will also help the sector, says David Carlson, director and equity analyst for Evergreen Investments.

Bullish analysts and investors point out how much sturdier the industry has become in recent years. Advancements in biology and chemistry have increased the volume and quality of potential drugs being researched. The robust financing window of the late 1990s helped dozens of young companies get funding. So while the Nasdaq tumbled 21% in 2001, the biotech sector fell just 8.5%. And its likely to do better this year despite the rough start.


  The setbacks of the New Year are surely nerve-wracking and could cause weakness in the short term. The bad news for biotechs did not stop with ImClone. Disappointing news on drugs being developed by the likes of Idec Pharmaceuticals (IDPH ), Endo Pharmaceuticals (ENDP ), NeoPharm (NEOL ), and Cubist Pharmaceuticals (CBST ), among others, have pulled biotech stock prices back some 10% the past four weeks.

Now, ImClone is on the House Energy & Commerce Committee's radar screen. The committee says it has "serious concerns" that ImClone's Dec. 28 press release may have omitted critical information about the FDA's refusal letter to the company. Namely, the press release did not mention that the FDA believes a new clinical trial might be needed for Erbitux. The company has said it is cooperating with the committee's inquiry and "remains fully confident in Erbitux and looks forward to continuing its dialogue with the FDA regarding potential approval of the drug."

Of course, in the best of times, the sector's stocks are volatile, and this year will be no different. On the upside, rising confidence about an economic recovery in the next three to six months will help biotechs, says Weidong Huang, health-care analyst at Times Square Asset Management. Biotechs typically gain ground when the tech-based Nasdaq index does well.


  The sector should also benefit from the pharmaceutical industry's strategy. While many drug-industry giants admit that 2002 will be a flat year for earnings, by and large they plan to keep research budgets intact. The result should be continued business dealings with biotech companies that have appealing drug prospects. "We'll continue to see a lot of agreements on terms that are very favorable to biotech. That's what drives these stocks," says Richard Evans, a drug-industry analyst at Bernstein Research.

Unfortunately, the blow to ImClone may drop the valuations of Big Pharma's deals with biotechs. But the need for their innovations will keep the big drugmakers interested, and that in turn should keep biotech stock valuations strong. "The pharmaceutical industry is a prisoner to new-product launches. In order to keep growing, the drug giants have to rely substantially on buying intellectual property from biotechs," Evans says.

Take the recent resignation of famed gene mapper Craig Venter of Applera, parent of Celera Genomics Group (CRA ). The announcement unsettled some investors in this segment of biotech, but the prevailing view is that his departure clears the way for Applera to make the transition more quickly into a product-focused company that could have something to offer Big Pharma.

Companies with proven track records like Amgen (AMGN ) and Genentech (DNA ) could help steady the industry. Finding a semblance of stability in biotech is no easy task, but as long as investors don't become too unhinged by the early disappointments, 2002 could feature some solid hits in drug development or on the deal front. And that will keep investors in the hunt for biotech treasures.

Tsao covers biotechnology issues for BusinessWeek Online. Follow The Biotech Beat every week, only on BusinessWeek Online

Edited by Beth Belton

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