Jan. 31, 2003 — By any measure, biotech stocks suffered a disastrous year in 2002. Mutual funds investing in biotech tracked by Standard & Poor’s incurred heavy losses across the board. The average biotech portfolio sank 43.6%, just slightly less than the NASDAQ Biotech index, which plunged 45.3%.
Aside from the harmful effects of weak global markets, biotechs were particularly hurt in 2002 by a string of disappointing clinical data from hitherto promising drugs, some negative actions by the Food and Drug Administration (FDA), the absence of an FDA commissioner for much of the year, and, most memorably, the debacle surrounding ImClone (IMCL) and its ill-fated cancer drug, Erbitux.
“Biotech is a high-beta sector and it’s been trading in disconcerting sympathy with the NASDAQ Composite,” said Jay Markowitz, a biotechnology analyst at T. Rowe Price funds. “Although biotechs have vastly different fundamentals from tech stocks, they have fallen with the tech sector.” Indeed, investors in biotech funds have been on a wild ride as the sector rose to dizzying heights in the late 90′s, only to plunge in the downturn after March 2000.
Making things more difficult for investors is the fact that the vast majority of biotechs are small and mid-cap firms with no products on the market and, hence, no earnings. “They have very few tangible assets, aside from cash,” Markowitz said. “The value of such companies is judged by the future promise of their products. Typically, these small biotech firms burn through cash and their stocks trade almost entirely on investor sentiment, which has been absolutely awful.”
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One of the most disastrous events was the debacle surrounding ImClone and its cancer drug, Erbitux, which was rejected by the FDA, and raised questions of possible criminal behavior at ImClone. “This caused a ripple throughout biotech because it led people to question the veracity of management and the ability of new, inexperienced companies to perform the appropriate clinical trials,” Markowitz noted.
Samuel Isaly, manager of the $800-million Eaton Vance Worldwide Health Sciences/A (ETHSX), which has about 40% of its assets invested in biotech, believes the Erbitux fiasco “made investors more skeptical about investing in biotech.” And, given that Bristol-Myers (BMY) aggressively acquired a stake in ImClone, “it also made the big pharma companies more gun shy about entering into high-profile licensing and partnership agreements with biotech firms,” he says. [The Eaton Vance fund, which is not a 'pure' biotech portfolio, declined 25.9% in calendar 2002. Similarly, another health sciences fund with a significant stake in biotech, the $39-million SunAmerica Biotech/Health Fund (SBHAX) declined 36%].
Markowitz cautions, however, that these partnerships will not disappear. “The bottom line is that big pharma is always looking for the next big drug, and the biotech industry is a frothy source for those drugs,” he says. “The reality is that it takes 10 to 15 years to develop a new drug and anywhere from $500 to $800 million.”
Indeed, Deane Donnigan and Gareth Powell, co-managers of the London-based Munder Funds Bio Tech2/A (MBTAX), noted that three of their holdings, Amylin (AMLN), Exelixis Inc. (EXEL) and Neurocrine Biosciences (NBIX), recently signed significant partnerships agreements with pharma giants Eli Lilly (LLY), GlaxoSmithKline (GSK) and Pfizer (PFE), respectively.
With regard to the FDA, which is crucial to the health of biotechs, Isaly does not think the recent appointment of a new commissioner will accelerate drug product approvals in 2003. “There’s been a slowdown in approvals, but there’s also been a slowdown of applications,” he said. “I think one reason is that big pharma and biotech companies are more reluctant to move forward with non-novel drug candidates.”