Growing Industry Gets Transfusion

After a long funding drought that brought many firms to the brink of bankruptcy, the biotech industry is being rejuvenated by soaring stock prices and an influx of fresh capital.

Biotech firms are using the money they have raised to move new drugs into clinical trials that might have otherwise stayed on laboratory shelves. They’re expanding their work forces, looking to acquire promising start-ups, building new facilities and signing on for services that will allow them to take advantage of the decoding of the human genome.

And the emerging strength of the sector has another benefit to individual companies: All the stock options used as bonuses to lure new hires and reward loyal workers are suddenly worth a lot of money.

Among the companies that have seized the opportunity to go to the market with initial public stock offerings in the last few months are San Diego-based Sequenom, which raised over $150 million, and another San Diego firm, Diversa, which raised $200 million.

And companies that have already gone public, such as Celera Genomics of Rockville, Md., are going back to the market for additional financing.

In the first two months of 2000, the industry pulled in more than $8.5 billion from stock offerings and private investments--that’s more than all of last year, according to a database maintained by BioCentury, a trade publication.

And there’s an additional $4.5 billion in deals already waiting on the table, according to BioCentury’s editor in chief, Karen Bernstein.

The influx of capital parallels the rise of biotech shares. Biotechnology stocks are on an amazing ride: Despite this week’s setback, the Nasdaq biotechnology index is up 62% since Jan. 1; the Amex index is up 76%.

Thanks to this run-up, biotech workers--many of them biologists--no longer need to envy the sudden paper wealth of their counterparts at software and Internet companies.

One middle manager at Incyte Pharmaceuticals in Palo Alto, who has been collecting stock options for the past five years, affirmed that he is now a millionaire--on paper--while still in his 20s.

“A good analogy is with the folks who win the Super Bowl,” said this biotech supervisor, who asked not to be identified. “You get caught up in the glory.”

Genomics Companies in the Vanguard

Leading the biotech boom are the genomics companies--firms like Incyte and Celera Genomics that probe the human genetic code, known as the genome, looking for individual genes, deducing their function and then patenting their discoveries.

These companies have become controversial because of their attempts to stake claim to our common genetic heritage. However, they also provide tools now recognized as indispensable to pharmaceutical and biotech companies seeking new ways of treating and diagnosing illnesses, including cancer, heart disease, arthritis and senility.

So strong are the genomics companies that investors may even be rewarding the biotech firms that sign up for their services.

When Corixa Pharmaceuticals in Seattle announced that it had signed up for Incyte’s premium database of gene sequencing information in early February, its shares shot up almost 30%. Later that month, when Vertex Pharmaceutical announced a similar deal with Incyte, the Cambridge, Mass., firm’s shares got a similar boost.

“You’re just seeing the pixie dust that spills over because the genomics companies are such darlings,” said Richard A. van den Broek, biotech analyst at Chase Hambrecht & Quist. “Does paying Incyte make a company more valuable? It’s a sign that the folks in research and development get it. . . . If you’re in the drug development business and not in the genomics game, you’re functionally extinct.”

Incyte’s chief executive, Roy A. Whitfield, doesn’t promise that his firm’s clients will get an immediate boost in share prices, but he jokes that the Vertex and Corixa experience “has not gone unnoticed by the marketing group here at Incyte.”

Like many biotech companies--both genomics and drug discovery firms--Incyte’s stock was flagging through the middle of 1999. But in the last six months its share price has shot up over 600%, with much of the dollar gains coming after the new year.

That increase in valuation allowed the company to raise $620 million last month. “To put that in perspective,” Whitfield said, “the total value of the entire company was $600 million back in October.

The cash will fuel the company’s continued work force expansion, primarily in St. Louis, where it operates a plant that distributes genes and gene fragments to pharmaceutical and biotech companies.

The company also will increase its own investments in smaller companies and look for acquisitions.

But the biggest benefit of the increase in share price for the 9-year-old company may be its impact on employees. “The unvested options encourage people to remain,” Whitfield said. “It’s still a competitive marketplace. We compete with other biotech companies for talent.”

One of Incyte’s rivals, Celera Genomics, has seen its share price climb more than tenfold in the last half year. The 2-year-old company, a unit of PE Corp. that trades as a tracking stock, is rapidly building its own portfolio of genetic information and is competing with the publicly funded effort to decode the entire human genome--a task that in complexity and importance has been compared to smashing the atom or landing a man on the moon.

Earlier this month, Celera completed a secondary stock offering that brought the company $944 million--$120 million more than originally announced, because its underwriters exercised an option to purchase added stock.

Other genomics companies are also rising on the same flood tide. But investors who signed on late in the journey may not be as happy as the corporate executives. Both Celera and Incyte stocks have fallen off sharply from their peaks this year--a reminder of the volatility of the entire biotech sector.

In these flush times for biotech, however, investors have responded eagerly to promising news from almost any company in the sector, whether its the announcement of a partnership with a pharmaceutical company, a newly issued patent or a freshly published scientific study.

Seattle-based NeoRx, for example, this week reported that a single dose of its combination radiation and antibody treatment cured human lung, colon and breast cancer tumors implanted in mice. That day its shares almost tripled in value. However, Wall Street analysts can cite plenty of promising drugs that cured human cancer in mice only to prove disappointing--or even toxic--when finally tested in people. While NeoRx has since given back a large part of the gain, it closed the week at $29.38, far above its 1999 low of $1.

Two factors have converged to boost interest in biotech shares beginning in mid-1999, said David L. Gollaher, president of the California Healthcare Institute, an industry trade organization. First, investors became wary of Internet and software companies.

“The biotech sector, because it was comparatively undervalued, was in a perfect position to pick up some of the slack, and it attracted investor dollars targeted toward high-growth, higher-risk ventures,” he said.

At the same time, an increasing number of biotech companies have now introduced their first products and are becoming profitable for the first time--proving the potential of the industry, he said.

Gollaher points out a fundamental difference between the information technology and the biotech sectors: “With the Internet and e-commerce deals, people know they can make a product, the only question is, Will people use it?”

He contrasts that with biotech and its potential to produce new drugs for difficult-to-treat diseases.

There, he said, “you know you want and need the product, the only question is, Can you make it?”

Big Investment Can Mean Big Payoff

It can cost hundreds of millions of dollars to produce a new biotech drug and win regulatory approval to market it, said Howard E. (Ted) Greene Jr., board chairman of Epimmune in San Diego. But once a drug is approved, the payoff--and the profit margins--are enormous, he said.

“These projects take time and they take money,” Greene said. “Companies that were pretty nervous about the availability of cash are now raising it.”

But, he added, “This kind of feeding frenzy usually doesn’t last more than two or three months before low-quality deals find their way to the market, and that tends to dampen enthusiasm.”

Meanwhile, many companies will have gathered the cash they need to develop their ideas.

“The good news is that many good companies with good ideas for important medicines will have raised enough money to endure the next drought, and many shareholders will see the benefit.”

* PROMISING ADVANCE?

Advanced Tissue Sciences rose on news of artificial-skin tests. C3

* COMING MONDAY

Biotech companies are sprouting up all across Germany.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The Next Big Thing?

Despite a recent pullback, biotech stocks have been one of the hottest sectors in the market, with investors excited by progress in mapping the human genome. Monthly closes and latest on the Amex biotechnology index:

Friday: 688.88, up 76% since Jan. 1

*

Source: Bloomberg News