Will Wall Street's Love Affair With Biotech Continue?

As more companies prove themselves with products and profits, biotech stocks continue to surge Early last month, three-year-old Regeneron Pharmaceuticals Inc. shook the business world by raising $99 million--nearly double what the company had originally planned to raise--in its initial public stock offering. The deal was remarkable for two reasons. The amount of money raised in this IPO was second in the biotech community only to that of Cetus Corp., of Emeryville, Calif., which raised $115 mi

May 27, 1991
Susan L-J Dickinson
As more companies prove themselves with products and profits, biotech stocks continue to surge

Early last month, three-year-old Regeneron Pharmaceuticals Inc. shook the business world by raising $99 million--nearly double what the company had originally planned to raise--in its initial public stock offering. The deal was remarkable for two reasons. The amount of money raised in this IPO was second in the biotech community only to that of Cetus Corp., of Emeryville, Calif., which raised $115 million when it went public in biotech's glory days of 1981, when Wall Street first became enamored with the potential of the technology. Moreover, Tarrytown, N.Y.-based Regeneron is a real long shot for investors: With no potential products even slated for clinical trials, the company is a good 10 to 12 years from delivering a marketable product.

Regeneron's windfall of April 2 may have shocked a number of technology watchers and inspired dark predictions from others. But the fact remains that while Regeneron's wildly successful initial public offering may be due in part to Wall Street hype, the company's promising science, growing market potential, experienced management, and strategic alliances render it one of the most promising young biotechs today.

Regeneron's therapeutic strategy is to use neurotrophic factors--specific, naturally occurring human proteins--to prevent degeneration or promote regeneration of neurons. Already scientists at the company have announced the cloning and characterization of three such factors: BDNF, NT-3, and CNTF. Though their therapeutic value is as yet unproven, the market potential for these factors is phenomenal. In a society with an aging population, neural disorders--for which there are no known cure--are a growing concern. Alzheimer's disease alone is predicted to afflict 14 million U.S. citizens by the year 2040. Parkinson's disease debilitates an additional 1 percent to 2 percent of those over age 60. The company that can translate a neurotrophic factor into a therapeutic that ameliorates or even counteracts such nerve degeneration will face tremendous market demand well into the foreseeable future.

Regeneron's top management is another asset investors are betting on. A team that includes leading neurologists and experienced businesspeople is further enhanced by a scientific advisory board that includes three Nobel laureates. This management team has signed two key joint ventures that have inspired public confidence. A $53 million research and development agreement with Amgen Inc. will yield Regeneron 50 percent of all resultant profits, and a marketing and R&D agreement with Sumimoto Chemical Co. of Japan is worth $10 million to the biotech. Regeneron also holds exclusive licensing rights to technology being developed at the Brain Research Institute in Zurich, where scientists have used antibodies to nerve growth inhibitors to promote spinal cord regeneration in animals.

But despite this scientific promise and managerial know-how, the unknowns that will influence the future of Regeneron should be enough to cow even the most enthusiastic investor. Neurobiology is still in its infancy, compared with immunology and other sciences that financiers have cashed in on. "We just recently discovered neurotrophic factors," says Solomon Snyder, director of neuroscience at Johns Hopkins University Medical School. "We don't necessarily know their role in normal conditions, much less if they will be effective therapeutic agents."

It takes seven to 10 years to get a relatively simple chemical therapeutic from initial synthesis to market. The process of identifying the neurotrophic factors, locating and cloning their genes, manufacturing them, getting them across the blood-brain barrier, identifying their function in animal models, and finally testing their safety and efficacy in humans could well take longer, Snyder says.

And finally, the question of proprietary technology is still very much up in the air within neurobiology. Synergen Inc. of Boulder, Colo., holds the only patent awarded to date for a genetically engineered neurotrophic factor (ciliary neurotrophic factor--CNTF), and Regeneron is one of the competitors that has challenged that award. As Snyder points out, legal counsel for all of these firms will be busy for a long time. "The neurotrophic factors are being identified by a number of different labs at approximately the same time," he observes. "So lots of corporate and university labs are applying for patents for the same factors."

--S.L-JD.

Regeneron's coup comes at what may be the height of a three-year run on biotech stocks. In the first quarter of 1991 alone, biotechs have raised a record $1.15 billion in 16 public offerings, double the $586 million raised in 1990 (see accompanying table). And as investors continue to display their confidence in the industry by sinking an increasing proportion of their dollars into IPOs for young companies like Regeneron (see story, page 9), firms are scrambling to take opportunity of this rare window of financing. "These are companies that have no product, and no prospect of revenue for three years or more," notes Roger Mc-Namee of the T. Rowe Price Science and Technology Fund, a Baltimore-based investment fund. "It only makes sense for them to make money when investors are in a feeding frenzy."

But Wall Street wouldn't be true to form if such stupendous performance didn't leave analysts feeling a little uneasy as to its cause and prognosis for continuing. And scientists, in addition to having an eye on their own investment portfolios, may want to question to what extent a mercurial financial community can impact the progress of biotechnology as a science.

Why has biotech been so hot on Wall Street? The good news is that much of the bullishness is grounded in real technological and market advances. In 1990 Chiron Corp. of Emeryville, Calif., won approval from the U.S. Food & Drug Administration for its hepatitis C diagnostics, and became profitable for the first time. Genzyme Corp. of Cambridge, Mass., garnered approval for Ceredase, its first therapeutic, for the treatment of Gaucher's disease. Sales of EPO, for anemia suffered by dialysis patients, netted Amgen Inc. of Thousand Oaks, Calif., $800 million. Malvern, Pa.'s Centocor Inc., which completed clinical trials on Centoxin and received European approval for sale of the septic shock therapeutic last year, saw its stock value increase from $25 on Jan. 1, 1990, to $78 in April 1991.

In addition to new product approvals and increasing profitability, patent awards also contribute to what Maureen McGann, a biotechnology analyst with Merrill Lynch Pierce Fenner & Smith, terms the industry's growing "believability quotient." McGann says that all three of the biotech patent rulings handed down in the first quarter of 1991 were in favor of the innovator--the first person or company to show that the product was viable. This reinforces the need for R&D spending, she says, and gives young companies a stronger case with shareholders for making tremendous capital expenditures long before reaching market.

But there are bears among the analysts, who indicate that at least some of the stocks' inflation has been due to general market factors rather than their inherent value. Biotech stocks, which were undervalued in recent years, may have been due for a market correction.

The market as a whole had a phenomenal first quarter, highlighted when the Dow Jones Industrial Average hit 3,000 for the first time on April 17. Moreover, as the best-performing sector in the best market Wall Street has seen in years, biotech stocks may well have fallen prey to "flippers"--investors who buy hot stocks and then resell them for a quick profit. "I don't think that there are a lot of long-term players in biotech IPOs," says Peter Drake of Chicago-based Vector Securities. In fact, Drake is staying away from all but the top-tier biotechs--those that already have a product on the market. "I view a spate of IPOs as a negative sign for the group," he says. "The stocks are too hot."

One manifestation of how popularity can turn sour on the market is the Regeneron offering, the management of which James McCam-ant, editor of the Medical Technology Stock Letter in Berkeley, Calif., terms "an inexcusable screw-up." The company originally planned to sell 3 million shares at about $17 per share. But the day before the offering, Merrill Lynch, Regeneron's underwriter, decided that the tremendous market demand for biotech stocks warranted upping the price to $22 and selling a total of 4.5 million shares.

The deal resulted in an immediate gold mine for Regeneron, but may have done real long-term damage. Two days after the IPO, the overvalued stock closed at $18, and it continued to drop throughout the month. In addition to alienating its own investors--many on Wall Street predict that Regeneron will have a hard time when it comes to a second offering--analysts express concern over the effect of the Regeneron fiasco on other biotech IPOs slated for this spring and summer. "Having one bad one like this makes it tough for everybody," says McCamant. "Investors get scared and suspicious."

Indeed, there is great precedent to warrant concern within the biotech industry over when--and just how violently--the current run on stock will end. No one within the investment community expects the market as a whole to continue its phenomenal performance of recent months--indeed, there are signs that investors have begun to back off already. And high-growth stocks--those, like biotech, that are based on expectations rather than real market performance--are always more volatile than other stocks.

"All of this has gone on too long," predicts McNamee, who points out that his fund increased 44 percent in value in the first quarter--without investing in biotech stocks. "Wall Street is a fashion-driven industry, and however wonderful biotech is, it's due for a rest." Other analysts recall that when the market crashed in October 1987, biotech stocks, which were already down 30 percent in some cases, dropped another 50 percent--substantially more than the market in general.

But this time, analysts are not predicting such industry-wide feast or famine for biotech. Rather, they are analyzing each company's chances of survival on an individual basis.

Proven Track Record

On page 4 of the April 29, 1991, issue of The Scientist, the Notebook item entitled "Tell Your Story To The World" listed an incorrect telephone number for the National Academy Press. The correct phone number is (800) 624-6242.
Top-tier concerns, like Genen-tech Inc. of South San Francisco, Calif., and Amgen, are the ones that have relatively little trouble raising money in any investment climate. These companies have proved to be viable businesses by delivering products to market, winning patent rights, and entering into shrewd joint ventures. Their future is as assured as that of any pharmaceutical company. Second- and third-tier firms, those that are grabbing public money today while they can, face a more uncertain future on the stock market. Ominous noises from analysts like Drake and McNamee, and a decline in stock performance within the past couple of weeks, indicate that their window of opportunity may be closing.

But as the industry as a whole continues to produce more "home runs" like Genetech's tissue plasminogen activator (TPA), EPO, and Centoxin, the companies with the soundest management and most promising science, regardless of their stage of development, should be able to find the support they need.

Susan L-J Dickinson is a freelance science writer based in Philadelphia.