Tuesday, February 2, 1999
DJIA 9242.71 -102.99 (-1.10%) S&P 500 1255.53 -17.51 (-1.38%) Nasdaq 2460.75 -49.34 (-1.97%) Russell 2000 419.04 -7.04 (-1.65%) 30-Year Bond 100 11/32 -21/32 5.23 Yield

An Investment Opinion
by Alex Schay

Biotech Brouhaha

Horsham, Pa.-based biotechnology company Cell Pathways (Nasdaq: CLPA) forged a path straight down this morning, falling $18 to $9 1/4 after trading was halted yesterday around 2:30 p.m. Eastern time. Triggering the halt was the announcement that its Phase III clinical trial for Prevatec (an anti-cancer drug) "suggests that the study did not achieve a statistically significant clinical response when compared to placebo." As a result, Cell Pathways reported that it expects to delay the filing of its New Drug Application with the Food and Drug Administration.

We get mail all the time from folks touting the potential for certain biotech firms, so from the outset, let's get some standard boilerplate language for investing in biotech companies out of the way:

"While the ultimate goal of a biotech firm is to market a product, it must subject itself to the U.S. Drug Development & Approval Process. This is probably the most rigorous new drug approval system in the world and, on average, costs $350 million and takes anywhere from 12 to 15 years to complete (from "lab to medicine chest"). The most important consideration for individual investors interested in biotech stocks is the reality of the drug discovery and development process. Only 5 out of 5000 compounds entering pre-clinical testing ever make it to human testing, and only 1 out of 5 of those is ever approved by the Food and Drug Administration (FDA)."

As far as Cell Pathways is concerned though, a substantial chunk of the clinical risk had already been eliminated from the equation. The firm had successfully completed Pre-Clinical testing, its Investigational New Drug Application, as well as Phase I and Phase II Clinical Trials (drug efficacy is addressed in Phase II, just on a smaller scale than Phase III). Understandably, the CEO for Cell Pathways is reported to have said, "We don't understand the results at this point. They are inconsistent with all of our prior human data." This, of course, opens the door for a possible faulty trial design or other factors, like the drug's ability to treat specific types of cancer.

Overall, however, the ultimate arbiter in the process is the FDA, and this "reality" is what confounds all the black box analyses of even the most competent professional biotech analysts (many of whom have medical degrees or substantial healthcare experience). Investing in biotechs is not really investing at all in my opinion, unless a profound understanding of the medicine involved proves to be an antidote to the boilerplate reality outlined above.

As a final word, much has been made of the comparison between biotech stock valuations in the early 1990s and the Internet companies today. To the extent that both types of firms trade on the potential addressable market for their "products," the analogy works (click here for a related Excel spreadsheet). However, the "odds" and product economics that biotech firms face in bringing a new drug to market are substantially more daunting than the potential for a computer user to get an Internet connection, click on a website, and order a product or service. In that way, the analogy is bunk, and the valuations are quite a bit more "rational" this time around.

[Cell Pathways Conference Call Replay 1-800 475 6701 #432996 -- Good till midnight on Thurs. Feb. 4th]


Shoe retailer Nine West Group (NYSE: NIN) kicked up $1 5/8 to $15 11/16 on last night's announcement that an SEC probe into the company's revenue reporting and importation policies has ended with no action taken. Merrill Lynch upgraded the stock's long-term rating to "accumulate" from "neutral" this morning.

Movie listing and ticketing service provider MovieFone Inc. (Nasdaq: MOFN) ran ahead $4 3/8 to $30 7/8 after America Online (NYSE: AOL) said it will acquire the company for roughly $388 million in stock. AOL intends to rebrand the business as AOL MovieFone, making it a key anchor tenant on AOL's online service. AOL lost $4 3/16 to $167 this morning. For more on the deal, dial up this morning's Breakfast With the Fool.

Construction cements maker Giant Cement Holding (Nasdaq: GCHI) hardened $1 9/16 to $19 1/8 after saying last night it expects earnings growth of about 25% for full-year 1999. The company also said it anticipates Q4 EPS of $0.46 or $0.47, short of First Call's four-analyst consensus estimate, because of "small maintenance problems [that] negatively impacted our production levels and increased costs."

Newark, N.J.-based bank holding company Broad National Bancorp. (Nasdaq: BNBC) broadened $1 1/2 to $24 1/4 after Independence Community Bank Corp. (Nasdaq: ICBC) agreed to buy Broad National for $26.50 per share, a 16.5% premium on yesterday's closing price.

Fiber optic network operator Level 3 Communications (Nasdaq: LVLT) rose $2 3/8 to $57 3/4 after saying it expects revenues of between $250 to $300 million for 1999 -- excluding coal properties and the SR-91 toll road -- moving to a range of $650 to $700 million in 2000. The company expects gross margins on communications services of between 20% and 35% in 2000 with a trend toward 60% in succeeding years.

Former presidential hopeful Ross Perot's information technology consulting company Perot Systems (NYSE: PER) raced ahead $26 to $42 in its first day of trading. The company sold 6.5 million shares at an initial price of $16 each.

Business Internet services provider PSINet Inc. (Nasdaq: PSIX) won $2 1/16 to $37 1/4 after announcing plans to expand the availability of its InterSky Internet access service into 50 new markets in the U.S. and abroad in 1999.

Telecommunications customer service and billing outsourcer Convergys Corp. (NYSE: CVG) added $2 3/8 to $20 7/8 after Merrill Lynch upgraded the stock to "near-term buy" from "accumulate."

Chip to chip interface technology company Rambus (Nasdaq: RMBS) moved up $5 1/4 to $80 1/8 after Morgan Stanley Dean Witter upgraded the stock to "outperform" from "neutral."

Information technology outsourcer and Y2K problem solver IMRglobal Corp. (Nasdaq: IMRS) improved $1 11/16 to $26 3/8 after Adams, Harkness & Hill boosted its rating on the stock to "strong buy" from "accumulate," setting a 12-month price target of $40 per share.

Senior citizen living facility operator Assisted Living Concepts (AMEX: ALF) gained $7/8 to $6 7/8 after slumping $6 5/8 yesterday on news that American Retirement Corp. (NYSE: ACR) agreed to end its proposed $500 million merger with Assisted Living, which will restate earnings for fiscal 1997 and the first three quarters of fiscal 1998.

Earnings Movers

ACNielsen Corp. (NYSE: ART) up $1 1/8 to $24 5/8; Q4 EPS: $0.36 vs. $0.27 last year; estimate: $0.33

Airborne Freight (NYSE: ABF) up $9/16 to $37 7/16; Q4 EPS: $0.78 vs. $0.60 last year; estimate $0.66

HON Industries (NYSE: HNI) up $15/16 to $20 13/16; Q4 EPS $0.48 vs. $0.42 last year; estimate: $0.47

MicroTouch Systems (Nasdaq: MTSI) up $1 to $17 3/4; Q4 EPS $0.33 vs. $0.24 last year; estimate: $0.30

PepsiCo (NYSE: PEP) up $13/16 to $38 15/16; Q4 EPS $0.24 vs. $0.29 last year; estimate: $0.23

U.S. Filter (NYSE: USF) up $3/4 to $25; fiscal Q3 EPS: $0.36 vs. $0.31 last year; estimate: $0.36

Wild Oats Markets (Nasdaq: OATS) up $2 1/2 to $26 1/4; Q4 EPS $0.25 vs. $0.17 last year; estimate: $0.25


Telecommunications services provider Sprint Corp. (NYSE: FON) tripped $3 11/16 to $80 1/2 after posting Q4 EPS from continuing operations of $0.79, ahead of last year's $0.72 but short of the First Call mean estimate of $0.85, as the firm continued to invest in its Global One joint venture with Deutsche Telekom and France Telecom and its Sprint ION data and voice service. Meanwhile, wireless unit Sprint PCS (NYSE: PCS) fell $2 1/4 to $29 5/16, despite adding 836,000 new subscribers in the quarter.

Coronary stents and medical devices maker Guidant (NYSE: GDT) dropped $2 9/16 to $55 13/16 after saying it will take a $49 million fiscal Q1 charge to account for its recently completed acquisition of Sulzer Medica's electrophysiology business. Additionally, Guidant announced plans to shutter two acquired Sulzer facilities over the next 12 months.

Healthcare and contract rehabilitative services firm Integrated Health Services (NYSE: IHS) slumped $1 5/16 to $11 3/8 after selling its home health nursing business to an affiliate of privately owned Medshares Inc. for undisclosed terms.

Neuropsychiatric drug developer Neurogen Corp. (Nasdaq: NRGN) slid $3 9/16 to $13 11/16 after interim results from the Phase I study of its NGD 91-2 anxiety treatment showed that its use had a statistically insignificant effect on about 40% of the subjects in the trial, which will extend the treatment's clinical development timeline.

Equine apparel designer Polo Ralph Lauren Corp. (NYSE: RL) was thrown for a $1 9/16 loss to $23 after saying it will take a $65 million pre-tax charge in fiscal Q4 to close nine of its free-standing stores and lay off about 250 employees. The company also reported Q3 EPS of $0.25, down from last year's $0.29 but in line with the First Call mean estimate.

Engineering software products developer Summit Design (Nasdaq: SMMT) sank $1 9/16 to $5 9/16 after saying slow U.S. sales will result in lower-than-expected Q4 revenues of about $10.9 million. The company said it has agreed to terminate its proposed merger with OrCAD Inc. (Nasdaq: OCAD) after both companies determined it was no longer in the best interests of shareholders. OrCAD fell $7/16 to $6 7/8.

Publishing tools company Inso Corp. (Nasdaq: INSO) dropped another $1 11/32 to $8 1/16 as several shareholder lawsuits were filed against the company following yesterday's announcement that it will restate its financial results for the first three quarters of 1998 due to revenue recognition problems.

Secure electronic transactions products company Entrust Technologies (Nasdaq: ENTU) lost $2 1/8 to $32 1/2 as Goldman Sachs said it would release about 38.7 million of the company's shares from the lock-up associated with the company's initial public offering on Feb. 4, or 12 days ahead of schedule.

Cancer and infectious diseases drug developer Immunex Corp. (Nasdaq: IMNX) was knocked down $7 3/8 to $153 7/8 after Salomon Smith Barney cut its rating to "neutral" from "outperform."


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