The Wall Street Journal - 15 April 1996
Deborah Lohse, Staff Reporter of The Wall Street Journal

In 1995 large pharmaceutical companies and many smaller biotechs had a tremendous year. The Nasdaq Biotechnology Index, for example, rose 88.5%. Much of the strength came from the improving outlook for Food and Drug Administration approvals and promising trial results at companies such as Cephalon. It showed initial promise in its Phase III trials of a drug to slow amyotrophic lateral sclerosis, or Lou Gehrig's disease.

Looking ahead, analysts expect a new wave of companies to turn profitable this year, keeping the sector strong. "As you get to the middle of the year, you're going to have more profitable companies," says Joyce A. Lonergan, a biotech analyst with Cowen & Co.

Biotechs are highly risky investments, of course, and many investors have been burned by them in recent years. Cephalon, for example, later plummeted when the FDA said it needed more data about the trials before proceeding.

"There always could be something that changes the dynamics of the business," cautions Mary Lisanti, head portfolio manager for small- and mid-cap funds at Bankers Trust. Still, she says, "of all the areas of investing, [biotech] is the area where patience really pays off."

Among the positive factors for biotech: The FDA recently announced that it will speed the approval of cancer drugs by accepting certain evidence that the drugs reduce tumors, rather than waiting for survival data. And a slew of new drugs and products initiated after the biotech booms of the early and mid 1980s are hitting important clinical-trial stages, analysts say.

Cowen analysts say the 100 companies in their biotech index are expected to bring 25 new products to their final trial stages in 1996, compared with the typical 18. In addition, they expect about 15 new product approvals in 1996, up from seven in 1995 and three the prior year.

While stocks of many larger companies have already run up in anticipation of such events, many analysts see upside in the biotechs that are somewhat further from market. The common thread among many of the most-promising small companies, analysts say, is that they have more than one product in the pipeline; they have established partnerships with larger pharmaceutical companies; they are getting more-favorable terms in their partnership agreements, and they have some experience designing trials that will pass FDA muster.

Many small investors won't be able to analyze these companies based on traditional financial analysis, advisers say. Many investors should leave the stock picking to mutual-fund managers in funds such as Capstone Medical Research Investment Fund, which has an average annual return of 18.47% over the past five years, according to Lipper Analytical Services. Other funds that invest in biotechs include Invesco Strategic Health Sciences and Vanguard Specialized Health Care Portfolio.

Some analysts have spotlighted small companies that are developing cancer drugs that could benefit from speedier FDA approvals. James McCamant, editor of the Medical Technology Stock Letter in Berkeley, Calif., is betting that Immunogen, which is in Phase III trials of its antibody for certain lymphoma patients in remission, will rally from its recent cash-flow problems and become a partner with a major pharmaceutical company soon.

He also likes Agouron Pharmaceuticals. Investors have been focusing on Agouron's HIV protease inhibitor, but Mr. McCamant says the company could get speedy approval of its anticancer product which has just started pivotal trials. In addition, he recommends Ligand Pharmaceuticals, which has a broad product portfolio of intercellular hormone-activated receptors, a number of which he says have anticancer applications. The company is retaining the rights to market the anticancer applications, he says.

Ms. Lisanti says she likes to see small biotech companies with a record of establishing partnerships with big pharmaceutical companies. She recommends Neurogen, which has an anti-obesity drug, because of its partnerships with Schering-Plough and Pfizer, as well as the company's ability to get good terms in the deals for itself.

She also recommends Pharmacopeia, which she says is like a drug-information clearinghouse for clinicians looking for results of certain combinations of drugs or other components.

No matter how promising the stocks, biotech and health-care issues tend to go in cycles over which investors may find they have no control, advisers note. Anyone who was invested in biotechs during their disastrous performance in the early 1990s can attest to that.

"These things can go into the doghouse and stay there," Ms. Lisanti says.

Linda Killian of Renaissance Capital in Greenwich, Conn., expects speedier FDA approval to give a boost to companies that provide clinical trials on an outsourcing basis, such as the recently offered Quintiles Transnational, Clintrials Research and Parexel International.

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