Biotech: A Comeback "Balanced On A Razor's Edge"

Skeptical investors want to see products that get to market and add to the bottom line

Buffeted by everything from the general economic downturn to an insider-trading scandal at high-profile cancer-drug startup ImClone Systems Inc. (IMCL ), the biotech industry was reeling when 2003 began. Hundreds of companies were trading below their cash values, the initial-public-offering market was moribund, and private outfits averaged less than a year's cash on hand -- with many facing the prospect of drastic cutbacks or bankruptcies.

But the spring brought a flurry of good news: new product approvals and promising results for experimental drugs such as Avastin, Genentech Inc.'s (DNA ) cancer treatment. From early March to early June, the AMEX Biotechnology Index soared 67%. "It's been more than a recovery -- it's been quite a resurgence," says Carl B. Feldbaum, president of the Biotechnology Industry Organization.

Insiders caution that the comeback is still fragile. "The sector is up dramatically, but valuations are way ahead of themselves," warns Genentech CEO Arthur D. Levinson. Indeed, since the spring boost, biotech stock indexes have barely budged. And most of the handful of recent IPOs are trading below their offering prices. It hasn't helped that sales of some new biotech products, such as Biogen's (BGEN ) psoriasis drug, Amevive, and MedImmune's (MEDI ) FluMist flu vaccine, failed to meet expectations. Or that a $100 million deal between drug giant Aventis (AVE ) and biotech Avalon Pharmaceuticals fell apart at the last minute. "Everything is balanced on a razor's edge," says venture capitalist Alan G. Walton at Oxford Bioscience Partners. "By the end of January, we should know if it will be a pretty hot year or a pretty dreadful year."

There won't be a boom unless new products hit the market and sales rise, analysts predict. That's a big change from the 2000 biotech bubble, when investors, excited by the sequencing of the human genome, bid up companies that planned to mine the new genetic information. The payoff of genomics has proven to be elusive, and those companies' stocks crashed.

Now, investors, financiers, and potential Big Pharma partners want promising drug pipelines and solid bottom lines. "In these kinds of markets, we will see people investing only in companies with exciting products that will be in the clinic next year," says Dr. Ivor Royston, a partner at Forward Ventures. Even better would be news of successful clinical trials and approvals by the Food & Drug Administration. "Everything is going to hinge on the rate of new approvals and the number of profitable companies," says Dr. Jean-François Formela, a general partner at Atlas Venture. But, he adds, "there is no doubt we will see spectacular failures."

Companies with bad news get punished. On Nov. 11, Vertex' stock tumbled 36.8% when the arthritis drug it has been developing with Aventis was put on hold after animal tests showed liver problems.

In general, though, analysts are hopeful. "Drug development is risky, but the biotech industry is starting to mature," says Dennis J. Purcell of the Perseus-Soros BioPharma-ceutical Fund: "We are seeing better-run trials, and companies are better financed because they raised capital this year."

What's more, he says, the FDA, under new Commissioner Dr. Mark B. McClellan, is perceived as friendlier to industry and quicker to approve drugs. And Big Pharma, which have their own pipeline woes, are itching to snap up promising biotech drugs and companies. "The industry fundamentals are strong," says analyst David Wood of investment bank Rodman & Renshaw Inc. "I'm pretty bullish." But this bull may also have a few stumbles along the way.

By John Carey in Washington

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