Undaunted By Skittish 1992, Biotech Experts Express Optimism About New Year's Potential

Executives and analysts see industry perking up, thanks to increases in product flow and supportive legislation The past year was a tumultuous one for the biotechnology industry, according to corporate executives and industry analysts. During 1992, the unprecedented level of financing that had been available in 1990 and 1991 virtually disappeared. Public biotech companies saw their stock lose nearly half its value from highs in January to lows at midyear. Landmark legislative decisions in favor of the agricultural sector were balanced by major product setbacks on the diagnostic and therapeutic side of the technology. But 1992 also witnessed significant advancements in both the laboratory and the clinical testing process. And although neither analysts nor company insiders agree on how the financial community will react to the biotech sector in the coming year, they express certainty that 1993 will see the industry dramatically step up delivery of products to the marketplace. According to the New York-based accounting firm Ernst & Young's annual report on the biotech industry, "Biotech '93: Accelerating Commercialization," at year's end the biotech sector consisted of more than 1,200 companies employing about 79,000 people, spending an annual $5 billion on research and development, and realizing almost $6 billion in sales world- wide. There currently are 20 biotechnology therapeutics and more than 600 diagnostic products on the market. And with more than 150 biotech products now in clinical testing, an estimated 2,400 product license applications pending at the Food and Drug Ad- ministration's Center for Biologics Evaluation and Review, and some 10,000 biotech patents filed with the United States Patent and Trademark Office annually, biotechnology is being viewed by experts as one of the most promising emerging growth sectors of the U.S.'s economy. But the young companies that make up this industry have learned that the path from lab bench to market is often rocky. Perhaps the most noteworthy event in 1992 was the collapse in the equity shares of virtually every public biotech company. Between January and May, the Dow Jones Biotech Index lost 36 percent of its value, while the Dow Jones Industrial Index stayed relatively constant. The drop came as a special shock to biotech entrepreneurs after the boom years of 1990 and 1991, when, during one 18-month period, 56 companies went public and the industry as a whole raised $5 billion. Financing for the industry has always come in cycles, and many analysts say that in 1992 biotech firms were "due" for a down year. But there are a few key events that helped to push the dip in stock prices even lower. Much-publicized litigation between Centocor Inc. of Malvern, Pa., and Berkeley, Calif.-based Xoma Corp. resulted in a ruling that Centocor had infringed on Xoma's pat-ent for monoclonal antibody therapy for gram-negative septic shock--this despite a broad patent that Centocor itself owned, thus bringing that patent into question. Analysts say such a ruling makes investors skittish toward the whole industry, as some feel it calls into question the validity of virtually every biotech patent. Shortly after this, FDA returned three high-profile products-- Centocor's Centoxin and E5 from Xoma, for the treatment of sepsis; and Ethyol, a cancer therapy adjunct developed by U.S. Bioscience Inc. of West Conshohocken, Pa.--to their companies, requiring more evidence of efficacy in each case. The financial result: Centocor's market valuation dropped 41 percent, U.S. Bioscience's dropped 44 percent, and the bottom seemed to drop out of the market for the entire biotech sector as investor confidence in the industry's ability to get products through FDA approval was shaken. The Xoma-Centocor dispute underlined several other issues critical to these young companies, analysts say. The first is just how essential patents are to a technology-based firm. Young biotech firms are all using virtually the same technology to tackle the same clinical challenges. If ownership of technologies is questioned in one situation, it makes investors wary of backing other biotech companies, analysts say. And patent disputes are likely to continue for biotechs. Some industry insiders point to a potential dispute brewing in the neuroscience area between Regeneron Pharmaceuticals Inc. of Tarrytown, N.Y., and Synergen Inc., Boulder, Colo., over ciliary neurotrophic factor (CNTF)--a biotherapeutic agent used to treat amyotrophic lateral sclerosis (ALS)--as the next big patent test. "You need to assess your position very carefully," says Larry Soll, chief executive officer for Synergen. And though he says he is confident of his company's patent position for CNTF, companies in general "may want to consider that energy may be better devoted to drug development than to legal skirmishes." George Ebright, chairman and CEO at Princeton, N.J.-based Cytogen Corp., adds that any group of new companies needs to go through a natural evolution of learning how to work together and resolve disputes, and that 1992 was just an especially painful period in this process for biotechs. Ebright, who was an executive in the pharmaceutical industry for 26 years before retiring as CEO of Philadelphia-based SmithKline Beckman (now Smith-Kline Beecham) in 1989, predicts that the biotechs will soon arrive at a solution similar to that of the pharmaceutical industry, in which cross-licensing and payment of royalties are virtual standard operating procedures. Just as important as the setting of precedents within the new industry, however, is the need for government to develop a history with these issues. "I like to call it a necessary clearing away of the legal underbrush," says Richard Godown, president of the Industrial Biotechnology Association (IBA). "It is essential that the patent rights are precisely defined, and sometimes the only way that can happen is to go through the courts." James McCamant, editor of the Berkeley, Calif.-based Medical Technology Stock Letter, observes that the courts are becoming "more predictable and more rational" in dealing with biotechnology, and that the patent office is doing a good job of rewarding the people who make discoveries by awarding fairly, but not overly, broad patents. In 1993, FDA will come under intense scrutiny from the biotech industry, experts say. Many company executives and financial analysts are uncomfortable with what they characterize as FDA's unpredictability and irrationality with regard to drug approvals. (FDA's denial for Centoxin, they cite as an example, came despite its own advisory committee's recommendation for approval.) "We want some rationality and more responsiveness from the agency," says Synergen's Soll, adding that perhaps the companies could get involved earlier in the approval process, so as not to get caught by surprise again. But FDA itself is tackling these shortcomings, including the tremendous backlog and delay in its review of applications. With the advent of congressionally authorized company user fees and the arrival of the first of 600 additional reviewers the fees will finance, 1993 should witness the beginning of positive change at FDA, industry analysts and corporate officials say (Susan L-J Dickinson, The Scientist, Dec. 7, 1992, page 3). If there is a single occurrence that analysts expect to set the tone for biotech in 1993, it is the completion of phase III clinical trials on Synergen's sepsis product, Antril. (Synergen hopes to submit a product license application to FDA by midyear.) Peter Drake, executive vice president of Chicago-based Vector Securities, for one, calls this a "huge event," and Soll concurs that Antril's success could be as important to the industry this year as the demise of E5 and Centoxin was in 1992. "It would confirm that Amgen [Inc. of Thousand Oaks, Calif.] is not the only integrated company [one that researches, produces, and markets its own products] to come out of biotech," Soll says. "It would validate the whole [biotechnology industry], and would lead to increased levels of interest and investment for other companies." But biotech companies are not waiting for Synergen's success, and though 1992 was not a stellar year financially for the industry, it did witness several scientific achievements, most notably in the area of product advancements. South San Francisco, Calif.-based Genentech Inc. completed phase III clinical trials of DNAse for the treatment of cystic fibrosis; Amgen's chemotherapy adjunct and chronic neutropinia treatment Neupogen brought in more than $260 million during its first year on the market; Chiron Corp. of Emeryville, Calif., submitted a premarket approval application to FDA for beta interferon in the treatment of multiple sclerosis; and Cambridge, Mass.-based Biogen Inc. entered into multicenter phase III testing of its novel anticoagulant, Hirulog. As a sample group, Drake says, these compounds illustrate biotech-nology's power and flexibility: cancer; chronic pulmonary ailments; and infectious, autoimmune, and cardiovascular diseases are addressed by these four products alone. At the same time, while observers generally expect 1993 to be exciting for biotech firms in the health care sector, they foresee it as being a landmark year for agricultural biotech-- which should see its first product reach the market. Last year, FDA declared that genetically engineered food products require no special regulation and the U.S. Department of Agriculture's plant and health inspection service ruled that field tests of transgenic plants do not require prior approval--a decision that, according to IBA's Godown, eradicated 85 percent of the permits required for ag-bio field tests. According to the Ernst & Young report, the odds-on favorite for the first product to receive approval from FDA is Davis, Calif.-based Calgene Inc.'s Flavr Savr tomato, with bovine somatotropin and three or four other products close behind. While R&D and product ownership continue to be the most valuable assets of the biotech industry, other aspects of business are coming to the fore for these maturing companies. Capital raised during 1990 and 1991 and the increasing number of products approaching the market combine to make it possible and necessary for companies to tackle marketing, manufacturing, sales, and distribution for the first time. These companies are engaging in a wide range of strategic alliances--from mergers and acquisitions to various forms of licensing, product swapping, and international agreements--to speed their products to market (Franklin Hoke, The Scientist, Nov. 9, 1992, page 1). In Vivo, a publication produced in Norwalk, Conn., reports that biotech acquisitions rose from 23 in 1990 to 31 in 1991, and 24 as of November 1992. And predictions call for 1993 to be a year of further consolidation throughout the industry. Larger biotechs will continue looking for alliances that will speed their products to market and prove to a community of increasingly discerning investors that they have not just the scientific but also the business know-how to survive on the market, insiders say. The pharmaceutical firms, they predict, will be looking for something even more basic. "The old-line pharmaceuticals: the SmithKlines, the Lillys, and the Mercks, are cash-rich and infrastructure-rich--they have great manufacturing capability, great sales forces and distribution networks, but they are product-bankrupt," Ebright observes. On the other side, many of the biotech companies present an exact complement to the pharmaceutical firms: With stock prices down, acquisition of biotechs is a tempting way for the pharmaceuticals to fill up their pipelines. And industry analysts and company executives alike predict that in 1993 there will be biotech companies for sale. If biotech stock prices continue to slump, all biotechs--large and small-- will represent a real bargain. Drake's favorite for a high- profile takeover target is Seattle-based Immunex Corp., because of its broad product line, much of it in advanced clinical testing. Ebright predicts financial difficulties for many of the young companies brought public during 1990 and 1991. "Some of them had not demonstrated their technology even to proof of principle, much less in the clinic," he says. "Nevertheless, there was a fever for the stocks, so they went public." Since then, however, a recessionary economy and increasing familiarity with the biotech sector have combined to create savvier investors, who want to back products close to commercialization, rather than just a concept. As many young companies did not take in sufficient funds to get their technology to that point, Ebright predicts that 1993 will be the year they sell out. Also of concern to biotech CEOs during the coming year will be a number of pending legislative issues. Companies continue to push for permanent R&D tax credits and relief for investors from capital gains taxes, but remain wary of efforts to revise the federal orphan drug law, which provides economic incentives for companies to develop drugs targeted to a small patient population. And no statutory issue has industry insiders more nervous than the prospect of price controls on drugs, being championed by Sen. David Pryor (D-Ark.). "Any kind of price control in any guise is wrong," asserts Godown, whose IBA plans to take an active part in any such discussion on Capitol Hill. "The inevitable result would be fewer dollars left for R&D, which means fewer drugs reaching the public. So everybody has a big stake in this, and it is the patient population which has the biggest stake of all." Another potential effect of capping drug prices, analysts say, would be a further drop in both biotech and pharmaceutical stocks, as decreased sales and earnings are reflected in decreased value. This could have a long-term impact not only on R&D investment, but also in terms of U.S. corporate ownership. "If the government is overly onerous and stock prices reflect that," says Vector Securities' Drake, "you will see a lot of mergers and acquisitions and there will be a lot of people in the pharmaceutical industry working for the Swiss, the Germans, the English, and the Japanese." But few are willing to speculate as to which side of the pricing issue--or any other political issue relevant to the biotech sector--the new Democratic administration will come down on. And industry insiders seem to be banking on President-elect Bill Clinton's recognizing the value of biotechnology. "In the last 15 years [biotechnology] has grown from early concepts of products to an industry that generates nearly $6 billion in sales. By the next century, we could be generating $40 to $50 billion in sales," notes Robert Beckman, CEO of Purchase, N.Y.-based Intergen Co. Susan L-J Dickinson is a freelance science writer based in Philadelphia.

Undaunted By Skittish 1992, Biotech Experts Express Optimism About New Year's Potential

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