Biotech Stocks Looking to Shake Off Ills

After a disastrous 1992, biotechnology stocks could attract renewed investor interest this year as the industry continues to grow up.

Many of the companies, still smarting from the selloff that has pulled their stocks down 50% or more from the admittedly ridiculous peaks of late 1991, will get a chance to retell their stories at a major investor forum this week.

The 11th annual Hambrecht & Quist Life Sciences Conference, which runs today through Wednesday in San Francisco, will include presentations from about 50 biotech firms--from profitable, established names such as Thousand Oaks-based Amgen Inc. to up-and-comers like Targeted Genetics.

The big investors attending the show don’t expect news of blockbuster drug breakthroughs, because the progress of most biotech research projects is fairly well-known in medicine and on Wall Street. But the forum gives investors the chance to refocus on the biotech companies that hold the greatest promise.

“I think a lot of people are looking on this conference as the beginning of the season for these stocks,” said Sandra Panem, manager of the Oppenheimer Global Biotech stock mutual fund in New York.

In fact, investors began to warm to some of the stocks in the fourth quarter, after pummeling them through the first nine months of 1992. Cambridge, Mass.-based Biogen Inc., which along with Amgen is one of the industry’s flagship firms, saw its shares drop from $49 late in 1991 to about $22 by September. Since then, the stock has rebounded to $43.25.

Panem’s fund, which had plunged 35% in value in the first nine months of 1992, recovered a significant chunk of that loss in the fourth quarter, finishing the year down 23%.

The stocks’ comeback is partly an outgrowth of the rally in small stocks generally since fall. But some investors also believe that Wall Street has been taking a second look at the intrinsic worth of some biotech research programs.

Even if a biotech company has no products on the market--and the vast majority still don’t--”there is a value to their technology,” said Ted Gomoll, manager of the G.T. Global Health stock fund in San Francisco.

Nonetheless, most objective analysts agree there’s little chance of returning to biotech stocks’ halcyon days of 1991, when prices reached stratospheric levels on giddy investor optimism about the industry’s future. That was when Carlsbad-based Immune Response Corp. rocketed from $3 to $62, fueled by excitement over its work on potential anti-AIDS drugs.

Today, Immune Response shares sell for $18.50--a 70% loss to someone who was unfortunate enough to pay $62 late in 1991.

“A lot of people were burned in biotech,” notes Joseph Edelman, analyst at Prudential Securities in New York. The legacy of 1992, he said, is that “investors are still nervous (about the industry), and it’s not easy to move them to action on the stocks.”

What’s more, the incoming Clinton Administration’s vow to restrain health care costs has raised the specter of price controls not just on established drugs but also on new ones--which could kill innovation in biotech, some experts argue.

“I think these stocks will drift until we see the outlines of the Clinton health care program,” said John Kaweske, manager of the Financial Programs Health stock fund in Denver. “And if we have price controls, there will be no more capital going into the biotech industry,” he said.

Yet some analysts argue that President-elect Bill Clinton’s health care plans could actually favor biotech, in that many companies are working on drugs that either prevent disease or lower the possibility of additional infections or other potential expensive complications in already-ill patients.

Panem, for example, favors such young companies as Protein Design Labs, IDEC Pharmaceuticals and Immunogen, all of which are developing potential antibodies for treatment of diverse types of cancer, she said.

Gomoll, who also likes Protein Design Labs, also mentions Cytel Corp. as an intriguing play. The San Diego company’s research focus is on drugs that treat immune-system disorders and inflammatory diseases.

For investors willing to take the risk, there is no question that Cytel is far more attractive at its current price of $8.75 than at its 1992 peak of $22.50. Even so, analysts warn that virtually all biotech issues should be considered long-shot stocks, with no guarantee that anything will come of their research. That’s why owning a basket of these stocks, rather than just one or two, is the only prudent way to go. Kaweske notes that, while there are hundreds of biotech companies (public and private) at work in the United States, only 17 biotech products have passed muster with the Food and Drug Administration and made it to market.

At best, Kaweske figures the FDA will approve another four or five important new drugs this year.

As biotech investors discovered the hard way last year, the FDA’s pace of approvals affects not only the companies involved, but market psychology toward the entire industry.

One reason for the stocks’ collapse last year was the FDA’s surprise decision not to approve Centocor Inc.’s drug Centoxin, an antibody used to fight certain infectious diseases. The FDA wants to see more research on the drug.

This year, the biotech drug that Wall Street most wants to see OKd by the FDA is Synergen Inc.’s Antril, an anti-inflammatory that has broad potential applications including treatment of rheumatoid arthritis, asthma and some bowel diseases.

“What this industry needs is another leader, another Amgen,” said Prudential’s Edelman. “Synergen could be it.”

If results of Antril’s final clinical trials are favorable when reported in April--and FDA approval begins to appear imminent--the entire biotech field could get a psychological lift, analysts say.

But if the test results aren’t good, “It could be the final straw” for many impatient biotech investors, Edelman warns.

In the meantime, a more pressing biotech-stock problem is one of supply: Dozens of private biotech firms are waiting in the wings to sell new shares this quarter, encouraged by the renewed interest in the industry since fall.

Kaweske bought one recent new issue, a firm called Creative Biomolecule, which is developing a protein that speeds up the process of healing broken bones. The stock came public at $7 in December and now trades at $8.

But many of the other new issues in the pipeline appear far less promising, Kaweske said, and he and other money managers worry that a sudden oversupply of biotech stocks could kill the still-fledgling rally.

Rather than chase new issues, Edelman believes that investors are better off staying with biotech companies that already have products on the market (such as Amgen, with its drugs that stimulate red- and white-blood cell production) or those that are nearing key FDA approvals (such as Biomatrix Inc., which is testing a drug that increases joint lubrication, to treat arthritis).

“The problem with this industry is that too many people keep recommending stuff that’s 10 years in the future, while panning the companies in the present,” Edelman said.

With stocks of many established biotech companies well below their 1992 peaks, investors should be shopping there, he said.

Biotech Stocks, After the Fall Where key biotech stocks stand, after their wild ride in 1992--and as a major industry conference convenes in San Francisco today.

52-week Fri. 1992 Est. ’92 Stock high/low close change EPS Cytogen 34 1/4-13 3/8 19 3/4 +19% -$0.63 Biogen 49 3/4-18 1/4 43 1/4 +18% 0.60 Genentech 39 3/4-25 3/4 39 1/2 +16% 0.13 Synergen 75-31 3/4 61 1/4 -6% -0.59 Amgen 78 1/4-49 1/4 69 1/2 -7% 2.07 Immunex 68-22 1/2 49 1/4 -14% -0.84 Genelabs Technol. 11 1/2-4 6 7/8 -25% -0.95 IDEC Pharmaceuticals 20 1/4-5 3/4 8 1/2 -33% -1.48 Cytel Corp. 22 1/2-5 1/2 8 3/4 -34% -1.22 Immune Response 47 1/4-12 1/4 18 1/2 -51% -0.25 Biomatrix 27 3/4-6 9 1/2 -57% -0.72 Centocor 60 1/4-9 1/2 18 1/4 -70% -3.32 Protein Design Labs 18 3/4-5 7/8 11 1/4 NA -0.21

All trade on NASDAQ except Genentech (NYSE). Earnings estimates: Standard & Poor’s.