The Biotech Roller Coaster

By Warren Gump (TMF Gump)
July 18, 2000

Volatility continued for biotechnology stocks during the first six months of the year. The warp-speed upward climb begun in late 1999 continued through early March. Around the 14th of that month, however, the stocks of most companies hit their peak and embarked on a sudden free fall. At the bottom of the plunge, the coaster started clinking upward, but the shock absorbers seem to be malfunctioning: Many stocks in the sector regularly move up or down 10%+ daily. Investors should accept that such volatility is part of investing in a sector with lots of promise and huge potential payoffs, but the very real risk of failure.

The mapping of the human genome is undoubtedly the biggest biotech story during the first half of the year. Anticipation was high heading into the year that Celera Genomics (NYSE: CRA) and the Human Genome Project would complete the task, sending gene information stocks like Celera, Human Genome Sciences (Nasdaq: HGSI), Incyte (Nasdaq: INCY), and Gene Logic (Nasdaq: GLGC) soaring. When President Clinton and U.K. Prime Minister Tony Blair said in mid-March that raw genome data shouldn't be patentable, however, the stocks swooned downward.

Despite moving the markets, those comments didn't reflect any new information -- raw genome data was never intended to be patentable and most investors knew it. You can only patent specific uses of genes that you discover. Even after digesting this non-news, most stocks didn't recover to their March peaks, reflecting the overall market and the fact that many of these stocks had moved too far, too fast -- a good number were up between twofold and fivefold in less than three months!

Late in June, the official completion of the rough human genome map was announced at the White House. Having the sequence of the 3+ billion chemical base pairs in the human DNA isn't an end in itself. Rather, it marks the official starting point of a race to determine the implications of the raw genomic data.

With the genomic sequence now laid out, scientists will need to filter through the data to find meaningful sections -- those that affect disease and well being. This task is akin to finding the proverbial needle in a haystack. A vast majority of the information in the genome is just filler, of no real medical value. Determining which sections influence disease is the next big challenge for the scientific community (and their supercomputers), which should present interesting challenges and opportunities for gene information companies.

The big biotech pharmaceutical companies also had plenty of announcements during the first half of the year. Industry bellwether Amgen (Nasdaq: AMGN) announced that it had filed a new drug application for NESP, a next-generation version of top-seller Epogen with less frequent dosing, and Kineret for rheumatoid arthritis. Assuming these drugs are approved by the Food and Drug Administration, they should open continued revenue growth in the years ahead. At the same time, expenses associated with research and sales force expansion will likely limit the company's 2000 earnings growth to a below-normal, low-double-digit percentage range. Another Amgen story is the launch of a patent infringement trial against Transkaryotic Therapies (Nasdaq: TKTX).

Genentech (NYSE: DNA) and Immunex (Nasdaq: IMNX) also had significant product development stories. Genentech announced in early June that the FDA had approved a new clot-busting drug, TNKase, which should allow it to regain the market share its Activase drug lost to Johnson & Johnson's (NYSE: JNJ) Retavase.

Immunex experienced the good news/bad news phenomenon. Its primary product, Enbrel, received FDA approval for use in early stages of arthritis, dramatically expanding its market potential (it had only been approved for severe cases). However, the company also released data showing that its potential asthma drug, Nuvance, had been less effective than expected in trials.

What an appropriate way to wrap up a biotech wrap-up: a reminder that, while biotechnology offers tremendous opportunities, the path to success will be strewn with many failures.

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