Biotechnology sector gets sinking feeling

By Victoria Griffith in Boston

Financial Times (9th January 2001)

Biotechnology stocks have lost 25 per cent of their value in the last
two weeks, prompting fears of a bursting bubble in the sector.

The Nasdaq biotechnology index fell from 1200 in the final week of
December to about 900 in mid-day trading Tuesday. While biotechnology
stocks were up slightly Tuesday compared with Monday, the damage to the
sector is worsening. Since its March peak, the industry index has
collapsed 45 per cent.

Analysts worry the sector may decline further, as investors increasingly
question lofty valuations. Like internet companies, most biotechnology
groups lose money. Even with the latest market downturn, profitable
biotechnology companies - there are an estimated 20 to 25 - are carrying
exorbitant price-to-earnings ratios. Genentech on Tuesday was valued at
about 120 times earnings, while Immunex trades at nearly 150 times
earnings.

The exuberance that surrounded the completion of the sequencing of the
human genome last year led to a rapid run-up in biotechnology stocks.
Between November 1999 and March 2000, the Nasdaq biotechnology index
tripled, with biotechnology companies initially seeming immune from the
sell-off in technology stocks. In a year during which the Nasdaq
Composite Index posted its worst performance ever, the biotechnology
component of the index rose 15 per cent.

But now investors fear genomics will not speed up the discovery and
development of drugs as quickly as many had expected. Earlier this week,
Genentech's chief executive Arthur Levinson warned investors that the
sequencing would not translate into shorter development time for new
drugs. No matter how promising, potential drugs still must be tested 
in laboratories, and human clinical trials and regulatory procedures 
continue to be burdensome.

"A lot of retail investors got into this sector with the false hope that
brand-new drugs were just one or two years away," says Yi Ri, an analyst
with the pharmaceuticals research firm Mehta Partners in New York. "They
are now realizing that biotechnology companies have a lot in common with
the 'dot-bombs'. They're very good at burning through cash and not
showing a profit at the end of the year."

Much of the run-up in biotechnology shares was fueled by retail
investors. Biotechnology chief executives, used to conversing with
institutional buyers, suddenly found themselves at investor meetings
addressing retail investors with a very limited understading of their
technology. "We have to do a lot of hand-holding," says Joshua Boger,
chief executive of Vertex Pharmaceuticals.

The biotechnology frenzy also triggered a spate of initial public and
secondary offerings. Last year the sector raised a record $40 billion in
capital. The capital influx has left some biotechnology companies flush
with cash. Genomics companies such as Human Genome Sciences has $1.7bn
in the bank, enough to survive nearly 15 years without turning a profit,
while Millennium Pharmaceuticals has $1.4bn in cash.

Some of the newer and weaker start-ups, however, may soon be forced to
shutter their operations. "Six months ago, there were a lot of bad
companies launching on the market," says Eric Schmidt, biotechnology
analyst at SG Cowen. "It won't be a bad thing to see them go."