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What's next for biotech?
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March 26, 2001: 2:27 p.m. ET
Hit hard in recent weeks, investors may want to turn to the cheap biotech index
By Beverly Goodman
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SAN FRANCISCO (Red Herring) - It isn't just Immunex that suffered from heart failure last week. The entire biotechnology sector seems in need of a little triage.
The Amex Biotech Index, reflecting the industry's biggest companies, dropped 5 percent last week alone, hitting a new low since April 2000. That poor showing makes the Nasdaq's 2 percent gain seem like a jackpot.
But as investors nervously sniff around the market for bargains while still fearing the worst is yet to come, we are presented with a surprising question: could biotech stocks actually be cheap?
 After all, the bottom appeared to fall out when Immunex (IMNX: Research, Estimates) gave its "there's bad news and more bad news" announcement Thursday, after the market closed. The company announced that it would drop late-stage studies on Enbrel for congestive heart failure because it demonstrated no efficacy in patients -- quashing analysts' predictions that the drug could become a billion-dollar blockbuster.
The company already had lowered Enbrel's rheumatoid arthritis sales estimates, due to a manufacturing capacity shortage that likely will hold down the drug's sales this year to $750 million. Enbrel is the best-selling new biologic of all time, growing to $650 million in annual sales last year, only two years after launch. At the rate Enbrel was going, some had hoped for sales of more than $1 billion this year.
Positive news about a psoriatic arthritis trial that could win Enbrel expedited FDA review midyear, with a launch shortly thereafter, wasn't enough to soothe frayed expectations. Investors abandoned the stock, and it fell 38.4 percent Friday on heavy volume to $11.63, a new 52-week low. Immunex is now trading 83 percent below its 52-week high.
Compare that to compatriots like Applera Corp.'s Celera (CRA: Research, Estimates), 70.4 percent off its 52-week high; Human Genome Sciences (HGSI: Research, Estimates), 57.2 percent off its 52-week high; and Abgenix (ABGX: Research, Estimates), 77.7 percent off its 52-week high.
More bad news in the short term
If the Immunex news wasn't bad enough for biotech fans, investors likely still were reeling from the earnings warning issued by Applera's Applied Biosystems (ABI: Research, Estimates) earlier Thursday.
The company, which makes gene sequencing and analysis equipment (with some machines priced as high as $300,000), said that sales would slow due to the strength of the U.S. dollar -- roughly 50 percent of Applied Biosystems's sales come from outside the U.S. -- and cuts in the company's research and development budgets.
Making matters worse are concerns that sales of Amgen's (AMGN: Research, Estimates) second-biggest drug, Neupogen, are slowing faster than expected and that forecasts for its new Aranesp anemia drug, which still is awaiting approval by the U.S. Food and Drug Administration, are too high. Amgen is the world's largest biotech company.
 After a great run, the heady days of biotech as a safe haven for investors are over -- for now, anyway. Last year the Amex Biotech Index gained 62 percent while the Nasdaq lost 39 percent.
"Biotech appeared to be a defensive play," says Edward Tenthoff, an analyst at Robertson Stephens. But a 30 percent fall for the Amex index so far this year has put an end to indiscriminate biotech investing and big bets on unproven companies.
"Biotech investing is no longer a pie-in-the-sky game," Tenthoff says. In 2000, the biotech industry raised some $40 billion through 67 IPOs, secondary stock offerings, and private placements -- more than was raised in the previous three years combined.
On the heels of those statistics comes an Ernst & Young study estimating that 35 percent of publicly traded biotech firms have less than a year's worth of cash, while 40 percent have only enough cash to last one to five years.
Words like "indiscriminate" and "unproven" should be banished from an investor's vocabulary, though. And while no one thinks biotech stocks will rebound in the next few months, there are some trends worth keeping an eye on. First, though, the bad news: Experts and pundits agree that we're still probably some 10 to 20 percent away from the bottom of the overall market. There's no doubt that the biotech industry will be dragged down in tandem with any drop in the Nasdaq.
Good medicine for the long term
Once the market settles, though, it won't be long before biotech breaks away again. "We don't consume fewer antibiotics in a recession," says Jean-Francois Formela, manager of the Atlas Venture Fund, which generally invests close to a third of its assets in biotech. Formela points to a huge number of drug approvals likely to occur in the next 6 to 12 months. "That will definitely have a positive impact," he says. "The news flow that moves biotech stocks is non-macro. It doesn't matter if there's a recession."
Marc Goldberg, a venture capitalist with BioVentures, even thinks many biotech stocks are nearly oversold. "A lot of companies are trading close to cash value," he said. "That is the hallmark of an over-corrected market."
Just as some investors are contemplating purchasing stalwarts like Cisco Systems (CSCO: Research, Estimates) and Sun Microsystems (SUNW: Research, Estimates) as they trade at levels they haven't hit before, biotech will see a similar pattern.
The first area to experience resurgence almost certainly will be the larger, profitable companies like Amgen and Genentech (DNA: Research, Estimates), or companies with late-stage clinical data, like Cubist Pharmaceuticals (CBST: Research, Estimates), which specializes in antimicrobial drugs used against life-threatening bacterial and fungal infections. The company is evaluating daptomycin, its lead product candidate and the first member of a new class of antimicrobial drug candidates called lipopeptides.
"Investors will be looking at companies with earnings and growth potential," Tenthoff says. "They're not going to wait two years for drug discovery and four years for product development. And that leaves a lot of biotech companies off the radar."
Veteran investors like Goldberg agree that biotech -- especially all the genomics upstarts -- was headed for a fall, but bristles at the notion that it was all just a flash in the pan. "You won't see the first genomics-derived products for years. So what?" he says. "It's still the biggest driver of value creation in the history of medicine. Anybody who doesn't appreciate that doesn't understand genomics."
Lest we forget, a goodly lot of folks made a bundle investing in the likes of Amgen, Genentech, and Immunex years before any of these companies put a product on the market and became profitable. 
© 1997-2000 Red Herring Communications. All Rights Reserved
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