Biotech Industry May Be the Key to Investors' Glee in 2001

BLOOMBERG NEWS

The biotechnology industry will introduce a wave of new drugs next year and advance hundreds of experimental medicines through late-stage trials, adding momentum to a stock sector that was a top performer in 2000.

More than 20 new drugs from industry giants including Amgen Inc. and Genentech Inc., and smaller companies such as Enzon Inc. and Coulter Pharmaceutical Inc., may boost enthusiasm for biotech shares overall, analysts said.

Investor excitement over the potential for genetic research helped drive up the stocks this year, even though few revolutionary treatments made it to market.

Next year, new products may make a record number of biotech companies profitable even as they invest heavily in research and development.

"Investors will realize that Amgen, Genentech and the other profitable biotech companies aren't a fluke," said Tim Bepler, who manages the $300-million Orbitex Health and Biotechnology Fund. "That's really going to [attract] more mainstream investors."

The Amex biotech stock index has surged 65% year to date, though at Tuesday's close of 647.04 points, it is down 31% from its record closing high reached on Sept. 28.

Although investors' gains in many of the stocks this year have been substantial, the sector has been wildly volatile. That volatility is likely to continue next year.

Adding to the risks in the stocks early in the year will be the expiration of lockup restrictions on the sale of millions of shares from initial public offerings last July and August. Those shares could flood the market in January and February, putting pressure on many stocks.

More than 95 biotech drugs won U.S. regulatory approval for sale or expanded use since 1995, more than triple the 27 drugs approved during the first half of the 1990s, according to the Biotechnology Industry Organization.

After approvals in 1997 and 1998 that included MedImmune Inc.'s Synagis, Immunex Corp.'s Enbrel, Genentech's Herceptin and Genentech and Idec Pharmaceuticals Inc.'s Rituxan--drugs that had total sales of $1.1 billion in 1999--the past 12 months have been quiet by comparison.

Many of the U.S. Food and Drug Administration's approvals of biotech products in 1999 and 2000 cleared the way for wider use of existing compounds rather than for the introduction of new ones. Consequently, biotech investors focused more on genetic research prospects instead of on actual biotech drug products.

Now, high-profile drugs are positioned for approvals. Earlier this year, more than 350 biotech compounds were in late stages of testing, according to the Biotechnology Industry Organization. That compares with more than 300 compounds a year earlier.

"There's enough new products waiting approval that it will spur more investor interest once they start to roll in," said Kurt Von Emster, partner at MPM Capital Advisors, which invests in biotech stocks.

Among these is Amgen's improved version of its blockbuster anemia drug Epogen, the No. 1 biotech drug in the U.S. The new drug, known as Aranesp, can be taken less often than Epogen and is as effective.

Amgen is awaiting approval for Aranesp in kidney-disease patients--where Epogen is currently used--and also plans to seek FDA permission to market Aranesp to anemic cancer patients.

Genentech, Tanox Inc. and Novartis are targeting the allergy and asthma market with their Xolair drug, which analysts say could have peak annual sales of about $240 million. Gilead Sciences Inc. could seek approval for an AIDS drug, tenofovir, which appears to combat strains of HIV that are resistant to other therapies.

And Idec and Coulter Pharmaceutical each have filed for FDA approval for their drugs for non-Hodgkin's lymphoma. Idec's Zevalin and Bexxar, which Coulter is developing with SmithKline Beecham (now GlaxoSmithKline), both work by attaching a particle of radiation to a cancer-seeking antibody, allowing doctors to deliver the cell-killing effects of radiation with pinpoint precision.

Zevalin would be Idec's second drug, and the first it developed on its own. Idec developed Rituxan with assistance from Genentech, which shares marketing rights to the drug. Schering has rights to market Zevalin overseas.

"Idec is launching its second product and maintaining strong growth," said Eric Ende, an analyst with Banc of America. "They are really becoming a true biopharmaceutical company."

The advances will extend beyond the big-name companies. Smaller firms such as Enzon and Imclone Systems Inc. are set to introduce their first drugs on the market next year with Peg-Intron for hepatitis C and C225 for cancer, respectively.

Mountain View, Calif.-based Aviron also could have a hit with its first product, Flumist, a nasal spray flu vaccine it developed with American Home Products Corp. Aviron shares have nearly quadrupled this year in anticipation of the introduction.

"For the 2002-2003 flu season, it could be a $500-million drug," said Avnish Patel, analyst at Fred Alger Management, which owns biotech shares.

As many as 30 biotech companies will turn profitable next year, up from 17 three years ago, said Jay Silverman, analyst at Robertson Stephens.

That increase may raise the bar that risks investors are willing to tolerate as they assess a company's technology, product pipelines, and prospects for approvals and sales, analysts said.

"The market is differentiating toward companies with near-term profitability. That's likely to continue even more as we come into a relatively sour market and investors are becoming very risk averse," fund manager Bepler said.

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A Hot Corner of Tech

Although many computer-related stocks have crashed this year, the biotech sector remains a hot area on Wall Street as investors bet on a wave of new drugs expected in this decade.

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Monthly closes and latest for Amex index of 17 biotech stocks

Wednesday: 647.04

Source: Bloomberg News

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