Biotech Firms Hit Their Stride : Pharmaceuticals: Sales may reach $4 billion by 1993. A more mature industry will smooth the wild fluctuations in company fortunes and stock prices.

In one sense, it’s business as usual for biotechnology: One company’s spectacular success is galvanizing the entire industry.

Today’s hero, Thousand Oaks-based Amgen, has seen its stock rocket up 150% in the last six months after a crucial patent victory, booming sales of its wonder drug erythropoietin and the Food and Drug Administration’s recent approval of its second product, another potential blockbuster.

But analysts say that over the last year or so biotechnology has begun to grow out of its boom-and-bust adolescence. They say there are signs that it is maturing as an industry and that its future cycles--though inevitable--will be much less volatile.

First, the industry is approaching a critical mass of accomplishments--not just pie-in-the-sky projections. Those accomplishments lie in the growing number of FDA-approved biotech products, now totaling 15, already on the market and generating revenues.

And the rate of product approvals seems to be accelerating. After 1990’s “dry season,” during which only one new biotechnology drug was approved, three drugs won FDA approval in the first two months of 1991 alone. As many as four more could get the green light later this year, said Jeff Trewhitt, spokesman for the Pharmaceutical Manufacturers Assn., a trade group in Washington.

The new approvals could help boost the industry’s sales to $4 billion a year by 1993, up from a projected $1.5 billion this year and $1 billion last year, said Peter Drake, a biotechnology analyst with Vector Securities of Deerfield, Ill.

In short, the pipeline of bioengineered drugs is filling up. That means that in the future a single product approval--or failure--may be less likely to cause wild fluctuations in companies’ business fortunes or stock prices.

“Since its birth around 1975, the biotech industry has been building its skill base for the future and is just now emerging into commercial reality,” said Steven G. Burrill, national director of high-technology services at Ernst & Young in San Francisco.

“We spent the 1970s and 1980s moving science from technology into products and into regulatory mechanisms. Now, we are finally beginning to see a volume of approvals out of the FDA.”

Real products give investors something to measure and value, said Ted Greene, former president of Hybritech, an early success story in biotechnology annals.

Greene engineered the sale of San Diego-based Hybritech, a monoclonal antibody manufacturer, to Eli Lilly for $480 million in 1986, making millionaires out of himself and other key players in the company. He now heads Amylin, another young biotechnology company based in San Diego that is developing diabetes treatments.

“People now know how to analyze these companies,” Greene said. “Back in 1980, you were looking at a Nobel laureate, a concept and management that said somehow it would figure out a way to make money.”

Greene has witnessed--and profited from--the evolution of biotechnology, an industry that sprang, he said, from two critical scientific breakthroughs in the early 1970s.

The first was the recombinant DNA process developed by a Stanford University-UC-San Francisco research team. The process involves extracting DNA molecules from mammalian cells and inserting them into bacteria cells to promote the rapid growth of a desired protein. The bacteria cells in effect become tiny factories.

Teaming with Eli Lilly, Genentech in 1982 became the first company to manufacture a successful recombinant DNA product--Humulin, the first synthetic human insulin. Until then, insulin for diabetics was available in usable quantities only from pigs.

The other major bioengineering technique was the so-called hybridoma method developed at Cambridge University, where cells were literally fused together in centrifuges to produce highly concentrated disease-fighting organisms called monoclonal antibodies. A cancer cell and red blood cell, for example, would be fused together to produce material that would retain the disease-fighting antibody properties from the blood cell and vigorous growth features of cancer cells. San Diego’s Hybritech sold the first successful monoclonal antibody products, all diagnostic in nature, beginning in the early 1980s.

But because of the immense complexity of the biotechnology and the labyrinthine course of the FDA approval process, marketable drugs have been few and far between. In fact, drugs so far have averaged eight years of development each. Because of their low number and the mysterious nature of the science, an inordinate amount of publicity has greeted each product introduction, often leading to outlandish expectations for “magic bullet” drugs.

Among investors, such expectations sometimes led to stock market frenzy, the best-known example of which was the spectacular leap in Genentech’s stock price after its initial public offering in 1980. The stock debuted at $35 share, and investors quickly bid it up to $80.

Of course, with hopes raised so high, disappointments were inevitable.

“There was a great deal of unrealistic expectations among companies and investors who believed that, because biotech specialized in making natural products as drugs, that every product would work with no side effects and that, because it was all natural, that the FDA would very rapidly approve everything,” said Robert Kupor, a biotechnology analyst with Kidder, Peabody & Co. in New York.

The industry’s biggest disappointment has been Genentech’s TPA or tissue plasminogen activator drug, approved by the FDA in 1987. Genentech made internal projections that the blood clot-dissolving drug would hit $350 million in sales. After it released those projections, some analysts estimated that TPA would quickly become a $1-billion drug.

The reality was that Genentech’s TPA sales “quickly plateaued at $200 million a year,” said Denise Gilbert, a biotechnology analyst with County NatWest Securities in San Francisco. The shortfall not only caused Genentech stock to fall precipitously but also led to widespread disillusionment among biotechnology investors in general, she said.

Also over-hyped was Cetus. In the early 1980s, observers believed that its Interleukin-II drug was a major breakthrough in cancer treatment and that it was on the verge of FDA approval. Today, Cetus still has not received permission to market the drug, and the revisionist thinking among analysts is that its market potential--assuming that it wins approval--is much smaller than originally hoped.

“When the drugs didn’t work out--as TPA didn’t prove to be the enormous product as was predicted--people threw up their hands and said it’s all a pipe dream,” Kupor said.

The new generation of companies with products just coming to market seem to have learned from their predecessors’ mistakes. One reason why Wall Street is so enthralled with Amgen is that earnings and revenue from EPO have consistently exceeded expectations, the exact reverse of over-hyped biotech drugs of the 1980s, said County NatWest’s Gilbert.

“Amgen has done a good job of managing investor expectations,” Gilbert said. “In fact, they worked very hard to keep expectations as low as possible, looking at the Genentech example.”

Amgen’s EPO is currently the shining-star drug of the biotechnology firmament. Since the FDA approved it in 1989, EPO has become the most successful drug introduced, with sales expected to reach $300 million for the 12 months ending this month.

Amgen’s crucial U.S. Circuit Court of Appeals victory two weeks ago against Genetics Institute over rights to the EPO molecule had a tonic effect on the entire industry and is another sign that the legal issues surrounding biotechnology patents are becoming less murky, said Bradford Duft, a San Diego patent attorney.

Amgen’s legal victory, which spurred a 12-point gain in its stock price the following day, came as a shock to many biotechnology observers, who were expecting a ruling that Amgen would have to share the EPO patent.

But because the decision created a “clear-cut winner and loser,” it was good for young biotechnology companies, Duft said, because it reinforced the value of patents and of fighting for them in costly litigation.

Sales of EPO, which so far has been used as a therapeutic drug for kidney dialysis patients suffering from anemia, could double or perhaps triple over the next four years in light of both the ruling and the FDA’s recent approval of EPO as therapy for AIDS patients who become anemic as a result of AZT treatment.

“In my opinion, EPO is what’s driving the biotech market right now,” Greene said. “It will be a billion-dollar drug in a few years and has again renewed the market’s faith that these small entrepreneurial companies are capable of launching a blockbuster drug.”

And more blockbusters are on the way. One of the three drugs that the FDA approved earlier this year was Amgen’s granulocyte colony-stimulating factor, or G-CSF, a drug that spurs the body to make white blood cells. Trademarked Neupogen, the drug is expected to find a huge market among cancer patients whose ability to produce infection-fighting white blood cells has been damaged by chemotherapy.

Another big FDA approval earlier this year went to Immunex of Seattle for its Leukine product, a drug similar to Amgen’s in that it stimulates white blood cell production. Immunex is targeting cancer patients who have undergone bone marrow transplant. Shipments of the product began Monday, capping 10 years of research, Immunex Chairman Stephen A. Duzan said.

“FDA product approvals are still seminal events in a still very young industry. They spark interest and bolster confidence,” he said, linking the stock market surge to the success of his company and others in finally introducing products.

David Hale, president of Gensia Pharmaceuticals of San Diego, describes the new Amgen and Immunex products as being superstar drugs on a par with EPO. “There are a whole bunch of applications of these products. I believe it will be at least a $1-billion market in three years in the U.S. alone.”

Two drugs likely to receive FDA approval later this year, one belonging to Xoma of Berkeley and the other to Centocor of Malvern, Pa., are also expected to enjoy vast markets. Both the Xoma and Centocor products fight sepsis infection in hospital patients, a malady with a 50% mortality rate.

Sales of both drugs will reach the “hundreds of millions of dollars,” said Vector Securities’ Drake.

Hale said one of the exciting new directions in biotechnology is a set of bioengineered cell-growth stimulants working their way through clinical tests. These drugs, Hale said, will be of major importance in medical treatment of burn and wound victims and thus will generate huge sales.

In raising stock prices, the renewed excitement surrounding biotech has brought on a flurry of stock offerings by biotech companies eager to capitalize. The dozen or so biotechnology offerings that have either been registered or completed this year are likely to raise upwards of $800 million. That would be nearly double the $450 million that was raised in biotech offerings during all of 1990.

“Everyone is lunging to jump through the window before the window closes,” said Kupor of Kidder, Peabody. “People eat when they get hungry and raise money when it’s available. We’ll see more of this as long as the market is good.”

Quite a switch from late 1989, when a proposed stock offering by Immune Response Corp. of La Jolla was scrubbed despite the company’s connection with polio vaccine discoverer Jonas Salk. The company finally completed the offering last summer but not before marking down its shares by 40% from the price originally targeted.

Despite the euphoria, observers still see the current surge in biotech stock prices with a jaundiced eye and a sense of deja vu.

“A down cycle is inevitable. Something will happen to one, throwing cold water on all the rest,” Greene said. “And all companies stumble--General Motors, Merck, IBM. It’s inevitable as Newton’s laws of physics.”

SNAPSHOTS: WEST COAST BIOTECH AMGEN -- Thousand Oaks Amgen’s first product, which treats anemia associated with chronic kidney failure, received FDA approval on 1989. Its second product, which fights bacterial infections in chemotherapy patients, was cleared for sale last month. Employees: 537 1990 Revenues (millions): $190.4 1990 Profit/(Loss) (millions): $19.10 Recent stock price (OTC): $125.00 52 week high/low: $130.50 / $27.63 CALGENE -- Davis Calgene is developing improved plant varieties and products for the seed, food and specialty chemical industries. Among its products are herbicide tolerant and insect resistant cotton, new plant oils and extended shelf-life tomatoes. Employees: 274 1990 Revenues (millions): $27.6 1990 Profit/(Loss) (millions): $(7.44) Recent stock price: $7.25 52 week high/low: $9.88 / $4.25 CHIRON -- Emeryville Chiron has three infectious disease products on the market and, along with a partner, has received approval to market the first blood-screening test for the hepatitis C virus. It also is developing wound-healing and opthalmics products. Employees: 615 1990 Revenues (millions): $78.5 1990 Profit/(Loss) (millions): $6.8 Recent stock price (OTC): $62.50 52 week high/low: $65.00 / $26.25 GENENTECH -- San Francisco Genentech’s products include a clot-dissolving drug and growth stimulating hormone for children. In development are treatments for AIDS, cancer, viral infections and cystic fibrosis, plus a hormone to aid in childbirth and a wound-healing drug. Employees: 1,910 1990 Revenues (millions): $476.1 1990 Profit/(Loss): $(98.0) Recent stock price (NYSE): $25.00 52 week high/low: $30.00 / $20.63 IMMUNEX -- Seattle, Wash. Immunex develops, manufactures and markets products to treat immune system disorders. It is waiting for FDA approval of Leukine, a white blood cell stimulant for use in cancer treatment. Seven other products are in clinical trials. Employees: 450 1990 Revenues (millions): $34.9 1990 Profit/(Loss) (millions): $(9.9) Recent stock price (OTC): $53.75 52 week high/low: $59.00 / $15.50 XOMA -- Berkeley Xoma develops products for septic shock, immune-related disorders, and bone repair. Its drug for bone marrow graft-versus-host disease is awaiting FDA approval and is being evaluated in treatment of rheumatoid arthritis. Employees: 325 1990 Revenues (millions): $20.5 1990 Profit/(Loss) (millions): $(23.7) Recent stock price (OTC): $26.87 52 week high/low: $33.25 / $15.00 Sources: Standard & Poor’s, Hambrecht & Quist,company reports

BIOTECH HITS THE MARKET Biotechnology firms have completed or filed notice of securities offerings totaling about $800 million so far this year, nearly double the $450 million raised in all of 1990. Here is a sampling.

Shares filed Company Filing Date (in millions) Calgene March 13, 1991 4.0 Davis, Calif. California Feb. 22, 1991 2.5 Biotechnology Mountain View, Calif. Centocor Dec. 7, 1990 * Malvern, Penn. Chiron March 6, 1991 2.4 Emeryville, Calif. Gensia Feb. 12, 1991 2.0 Pharmaceuticals San Diego Genzyme March 8, 1991 3.0 Cambridge, Mass. Immunex March 6, 1991 2.0 Seattle ImmunoGen Feb. 13, 1991 1.6 Cambridge, Mass. Liposome Co. Feb. 19, 1991 3.0 Princeton, N.J. Regeneron Feb. 20, 1991** 3.0 Tarrytown, N.Y. Synergen Feb. 25, 1991 2.25 Boulder, Colo. Xoma Feb. 26, 1991 3.0 Berkeley

Value of offering Company (est. in millions $) Calgene $32.0 Davis, Calif. California $36.0 Biotechnology Mountain View, Calif. Centocor $106.6 Malvern, Penn. Chiron $134.0 Emeryville, Calif. Gensia $33.0 Pharmaceuticals San Diego Genzyme $100.0 Cambridge, Mass. Immunex $107.0 Seattle ImmunoGen $22.0 Cambridge, Mass. Liposome Co. $30.0 Princeton, N.J. Regeneron $50.0 Tarrytown, N.Y. Synergen $75.0 Boulder, Colo. Xoma $90.0 Berkeley

* Convertible subordinated notes. ** Initial public offering. Sources: IDD Information Services, Medical Technology Stock Letter, BioWorld Today, company sources