Biotech Stock Surge Expected to Continue
A late 1999 surge of investor exuberance for biotechnology stocks is likely to continue this year, say a number of industry watchers, who also predict a sharp increase in biotech initial public stock offerings in 2000.
The market has finally appreciated the underlying value in a sector that has long been overshadowed by computer technology and Internet stocks, these analysts say.
That’s changed for a variety of reasons: The success of large-cap companies such as Amgen and Genentech has fueled interest in smaller companies; a number of new biotech drugs will reach the market in the next few years; and news events, such as the first successful mapping of a human chromosome, has reminded the public of the enormous potential of the biotech industry to produce products for treating and diagnosing diseases such as cancer, arthritis and heart disease.
As if to make the point, both of the big biotech companies began 2000 with nice gains: On Monday, Amgen rose $2.88, or 4.8%, to close at $62.94 in Nasdaq trading; Genentech ended up $1.50, or 1.1%, at $136 on the New York Stock Exchange.
While the experts are generally bullish, some note that many biotech stocks remain risky investments. Share prices are almost guaranteed to plummet if a new pharmaceutical proves disappointing when tested in patients or is rejected by regulators.
The largest companies, profitable firms with federally approved prescription drugs on the market, have been leading the charge. But for the first time in years, smaller firms are enjoying handsome gains as well--including companies that have developed systems for manufacturing human-like antibodies and others that have miniaturized chips for detecting human genes.
Overall, both the Amex Biotech Index and the more broadly based Nasdaq Biotech Index were up by more than 100% in 1999--with about half of the dollar gain in both indexes coming in December.
Biotech has seen even bigger gains in the past, says Fariba F. Ghodsian, an analyst with Cruttenden Roth in Santa Monica. In 1991 the Amex Biotech Index rose by 320%; in 1996, by 150%.
“There’s still room for growth compared to previous rallies,” she said.
The large-cap stocks--those with market values of $1 billion or more--account for most of the gains in these biotech indexes, said Steven Burrill of Burrill & Company in San Francisco, a merchant bank that specializes in life sciences companies. The large caps were up 180% compared with 67% for the small caps, those with a market value of less than $500 million--still a good return for investors.
“One could say the public markets are effervescent today, fueled by Genentech’s financings,” Burrill said. Genentech shares ended the year up almost 180% since Roche Holdings exercised its option to buy up all of Genentech’s outstanding shares and then reissued stock in the reconstituted company.
The South San Francisco company has a number of promising drugs in final testing in patients, including an antibody that appears to block blood vessel formation in tumors and another that could prove useful for asthma and hay fever.
Amgen, based in Thousand Oaks, also boasts a rich pipeline of potential new products, including a novel hormone therapy for treating prostate cancer and longer lasting versions of its two billion-dollar drugs, Epogen and Neupogen.
Another factor in the return of biotech, according to Burrill and others, is the success of three Northern California companies that went public in December: Maxygen in Redwood City, Tularik in South San Francisco and Caliper Technologies in Mountain View.
Maxygen, a company that has a patented technique for creating variations of natural enzymes, saw its stock end the year at $71--more than four times the $16 share price of just two weeks ago. Tularik, a drug discovery company led by several former Genentech officials, saw its shares more than double from its $14 initial offering. Caliper, which produces miniaturized genetic laboratories on glass chips, quadrupled in value from its $16 offering price.
That’s great news for an industry that has seen a long drought in the IPO market, and Burrill and others believe many private biotech companies in the sector are poised to go public in the coming months.
“A lot of these companies are very high quality, because the market has been closed so long,” said Matthew Geller, an analyst with IBC World Markets. The companies lining up to go public have mature products that are nearing the market, he said, unlike in 1991 when many early stage companies went public and proved disappointing to investors.
And there should be plenty of capital available for these firms without diluting the worth of other companies in the sector.
“Genentech raised $3 billion over the summer, and the group rallied,” he said. “Even if a dozen companies go public at $100 million each, that’s only a billion.”
A year ago, investors weren’t so optimistic. And Kurt von Emster, portfolio manager for the Franklin Biotechnology Discovery Fund was holding onto cash rather than investing it.
That changed when investors who had money in other high tech areas or in pharmaceutical companies began rediscovering biotech. “When tech valuations were really high in October and November, a lot of that money was filtered to biotech,” he said.
And von Emster believes that those new investors are likely to stick with biotech, regardless of what happens to Internet stocks, because of a recognition of the value of “genetic information that will eventually eliminate disease.”
Health care investors also joined in, he said, when they saw that the big pharmaceutical companies were simply not performing, amid talks of mergers.
Shares in von Emster’s fund doubled in 1999.
“All of a sudden, everybody is making money,” said Jim McCamant, editor of the Medical Technology Stock Letter. Last year, the larger biotech stocks began to move, and the trend has spread slowly down to lower-tier companies as well. Among the companies that have seen their share prices soar is Abgenix in Fremont, which developed a genetically engineered mouse that can produce humanized antibodies for treatment of a variety of diseases.
Company shares closed the year at $132.50 on Nasdaq, an increase of more than 700% for 1999. A large number of biotech drugs being tested in a range of diseases are such antibodies, and several of these drugs, including IDEC Pharmaceutical’s Rituxan and Genentech’s Herceptin, have proven to be successes.
Despite the general enthusiasm, there are still reasons for caution. Burrill, for example, worries that growing sentiment against biotech foods and crops “will spill over into biotech generally.” And he noted that a number of accomplishments in human genetics have raised ethical issues that could plague the industry.
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Formulating Success
The major biotech stock indexes surged in 1999, with much of the gain occurring in the last month. Those who watch the sector say that investors have a new appreciation of the value of these companies’especially for those with new products on the market or with drugs in the pipeline that could win regulatory approval in the next few years.
Biggest Gainers
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Ticker Mon. 1-mo. Company symbol close % chg. Cephalon CEPH $35.75 +64.8% Immunex IMNX 102.00 +47.8 IDEC Pharm. IDPH 93.25 +46.3 Protein Design Labs PDLI 69.25 +42.7 Amgen AMGN 62.94 +38.9 Bio-Technology Gen. BTGC 15.00 +37.9 COR Therapeutics CORR 28.13 +36.5 Chiron CHIR 45.00 +27.4 Vertex Pharm. VRTX 37.56 +27.3
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Amex Biotech Index Weekly closes and latest:
Jan. 1, 1999: 185.13
Monday: 395.69
Source: Bloomberg News
