NEWS

Biotech Industry Tries to Recover from 2-Year Lull

Vicki Brower

The biotechnology industry has not fared well in the last 2 years. Company valuations and stock prices plummeted, clinical trial results disappointed, and financings became rare. Last July, both the American Stock Exchange and the NASDAQ Biotech Indexes sank to their lowest since late 1998. The American Stock Exchange Biotech Index fell 42% last year after rising 62% in 2000 and dropping 8.5% in 2001.

Although more than 370 biotechnology drugs are in the clinic or awaiting approval—the most ever, with more than half of them cancer drugs—fewer drugs were approved in the past 2 years than in the years before them, said Steven Burrill, head of Burrill & Co., a San Francisco-based life sciences merchant bank. Ninety percent of companies’ stock prices were down last year, with nearly 40% of companies trading at $2 per share or less.

On the bright side, however, the industry managed to raise $10.4 billion in 2001 and generate almost $7.5 billion with partnering deals. Although the public markets were down, venture capital came to the rescue, contributing about $2.7 billion—more than the previous year.

"Considering the cascade of faith-eroding episodes that took place this past year, this is a remarkably good report card," Burrill said. And in January, while the market stayed low because of a possible war with Iraq, the financing window began to open.

By the end of 2002, many companies had one year or less of cash left in their reserves, and downsizing and setting aside certain research projects became commonplace. Many, if not most companies—even those like Geron Corp. (Menlo Park, Calif.) that are comparatively financially stable—had to prioritize and reorganize. The financial climate produced some unexpected alliances, like former competitors EntreMed (Rockville, Md.) and Celgene (Warren, N.J.), who had previously filed lawsuits against each other over rights to thalidomide analogues. Late last year, EntreMed licensed to Celgene development rights for its thalidomide analogues, bringing it back from the financial brink. Four years ago, EntreMed’s stock price went through the ceiling to $98.50 as animal data of one of its antiangiogenesis drugs were publicized on the front page of the New York Times. As high hopes were not met, its stock price fell; more recently, it sunk to less than $1.

The Decline

The downhill slide began with the bust of the genomics euphoria of 2000 after the completion of the Human Genome Project, said Robert LeBoyer, senior biotechnology analyst, InvestBio, New York, an independent biotechnology research firm. Stock prices of genomics and other companies rose crazily as investors anticipated imminent breakthroughs in drug discovery. But it then became clear that the Human Genome Project would not immediately impact this process, said Sharon Seiler, Ph.D., vice president and senior biotechnology analyst at Punk, Ziegel & Co., New York. Stock prices began falling back to a more reasonable level, and then kept falling, LeBoyer said.

The corporate side of biotechnology came under scrutiny in late December 2001 when the U.S. Food and Drug Administration refused to accept ImClone Systems Inc.’s new drug application (NDA) for Erbitux, its epidermal growth factor receptor (EGFR) inhibitor. The company’s promotion of the drug at medical meetings and to investors, as well as allegations of insider trading, became the focus of a congressional investigation.

ImClone’s downhill slide set the tone for 2002, said LeBoyer. Revelations of questionable accounting practices at Elan Pharmaceuticals, Dublin, followed in early 2002. Soon after came the corporate scandals of Enron and WorldCom, which all contributed to an atmosphere of corporate mistrust and economic uncertainty, LeBoyer said.

With a grim economic climate overall, the biotechnology industry could not withstand the powerful, general downward turn of Wall Street, said Bennett Weintraub, Ph.D., an analyst with BiotechTracker, San Diego.

Long-Term Investment

Biotechnology drugs are a long-term investment, and in contrast to general technology, has a much longer product development cycle: it still takes 5 to 15 years and $300 million to $500 million to develop a new drug, with high failure rates. And, unlike technology products, a new drug must offer added value of a novel or improved treatment. In short, biotech has always been, and remains, high-risk, say analysts.

The downward trend of the past 2 years is not unusual nor new, Weintraub emphasized. Throughout its comparatively short 25-year existence, biotech has followed specific cycles and can be expected to continue on that track.

Stock prices are low now because the perception of risk is quite pronounced, said LeBoyer. He noted that Genentech’s Avastin (bevacizumab), a vascular endothelial growth factor inhibitor, did not yield statistically significant results in its first phase III trial in metastatic breast cancer, and the drug company subsequently saw its stock price drop. Genentech is now pursuing clinical trials of the drug in metastatic colorectal cancer. However, investors look at past performance as a guide to future success, which could result in a consistently low stock price until new data are presented. Conversely, success in one trial raises expectations for success (and stock price) in a second, which can be shattered with any negative or even ambiguous trial results.

Pushing experimental drugs through badly designed or poorly documented trials, and touting them to anxious investors to preserve stock prices and encourage investment, is just bad management, said biotech observer Stephan Herrera of the business journal, Red Herring. "One might think that in a downward-bound market, investors would value a careful approach to clinical trials on the theory that it’s better to be safe than sorry," Herrera said.

OSI, Roche, and Genentech’s handling of Tarceva, a small molecule EGFR tyrosine kinase inhibitor, is an example of a more prudent approach. The companies played it safe and slow, Weintraub said, wagering that they would not lose by being second or third to market.

The companies are conducting numerous trials in a variety of cancers. The scientific rationale is that EGFR is overexpressed in a wide range of solid tumors, including pancreatic, lung, prostate, colorectal, head and neck, and kidney cancers; only clinical trials will tell in which indication(s) it would be most effective. Businesswise, it takes deep pockets to conduct this many clinical trials, but the drug may have a better chance of succeeding in trials if it is tested in a number of indications and configurations (tested alone and in combination with other anticancer drugs).

Cancer Drug Approval

Cancer drugs have an advantage over others at the FDA, Weintraub believes. "Cancer is a more forgiving indication," he said. He noted that drugs may be approved with strong phase II data even with only marginal benefits for cancer. Weintraub cited the FDA Oncologic Drugs Advisory Committee’s qualified recommendation for accelerated approval of Iressa (gefitinib) in non-small-cell lung cancer as a third-line treatment, even though it shrank tumors in only 10% of 216 patients by one-half or more. The phase II trials submitted were not controlled, and in controlled phase III combination trials, Iressa did not provide a survival advantage, so some committee members doubted the efficacy of the drug. Weintraub believes that it is unlikely that for any other indication would such data persuade even some committee members to recommend approval.

Observers note that despite poor market results, there have been some notable successes in the past few years. In the future, more progress can be expected with the expansion of molecular targeting and the application of pharmacogenomics to determine in which patient subgroups a drug is most likely to be active.

Despite the current bear market, the larger picture indicates future promise, analysts say. Even now, large biotechnology companies—Genentech, Amgen, and Biogen—show strong sales growth. Companies with drugs in phase III testing for new indications should also be watched. "I am excited about the cancer drugs [in the pipeline]," said Weintraub. "Time will tell which are the best to control, if not cure, cancer."


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