Street Sense: The fundamentals of stock market investing
Free Ride for Biotech is Over
Investors have been very patient with biotech stocks. Now they want to see results on the bottom line.

BY JERRY HELZNER

Wall Street has typically been very tolerant of companies working to develop concepts with great profit potential. If a stodgy steel producer had two bad years in a row, stockholders ran for the hills and the company's stock slipped into single digits. But if a money-losing biotech outfit claimed to be perfecting a cure for cancer, or another dread disease, even savvy investors continued to throw money at the company.

Wall Street's ongoing sponsorship of promising -- but profitless -- biotech companies supported their stock prices at high levels and funded the costly research conducted by those impressive teams of scientists. This month, we'll see why that support is beginning to erode.

	ILLUSTRATION: PHILIP HOWE

INVESTORS WANT RESULTS

Today, there are scores of biotech companies listed on the stock exchanges, pursuing everything from cancer cures to new treatments for athlete's foot. Some of these companies, such as Genentech, Amgen and Immunex, have already proved they can deliver effective therapeutics. But the vast majority of biotechs have yet to put a penny of earnings on the bottom line.

In recent months, the biotech landscape has been littered with failed clinical trials, ineffective treatments, approval delays and even manufacturing issues. These disappointments have caused some biotech stocks to lose more than 50% of their value immediately after announcing adverse news. Recently, Imclone dropped from more than $60 a share to $16 on the news that the FDA has questions about the validity of clinical data from studies involving a new cancer treatment called Erbitux. Could it be that investors' patience with biotech stocks is finally wearing thin?

Biotech still holds great promise for the future, but investors are coming to the realization that not every company involved in genomics is going to wind up as a great success story. For every biotech company that produces a blockbuster drug, there will be 10 that will eventually burn through their funding and fall by the wayside.

DRUG APPROVALS ARE KEY

The new reality in biotech is that investors are beginning to differentiate between those companies that can put FDA-approved drugs into the marketplace and those whose most promising compounds are still in clinical trials.

Millenium Pharmaceuticals, for example, which has a number of new drugs in trials but little in current revenue, recently agreed to acquire COR Therapeutics, which has a proven cardiovascular drug called Integrelin already in the marketpplace. With the addition of COR, Millenium will have about $400 million in revenue in fiscal 2002, making the company more than just a speculation on the success of future products. Other biotechs are following Millenium's lead and seeking mergers with companies that already have revenue-producing drugs.

Amgen is set to acquire Immunex, which produces a highly effective arthritis drug called Embrel. Though Amgen is paying a high price for Immunex, there are preliminary indications that Embrel could be a "wonder drug" with applications extending well beyond the treatment of arthritis.

EXPECT MORE MERGERS

Throughout the biotech community, the word is out: Start producing revenue or see your company's stock price fall.

With this new imperative, expect to see a great deal of merger and acquisition activity in the biotech sector in the next year. The patient years have ended in this industry, and investors will now only pay up for companies that can display the ability to produce earnings.

Ophthalmology Management Associate Editor Jerry Helzner has written more than 50 articles on stock investing for Barron's. He has been a regular stock market columnist for other business publications and was a member of the equity research department of a major regional brokerage firm.