By Randall Osborne


Lilacs are near blooming and robins have returned to the spring-warmed north, but biotechnology's winter of discontent goes on. As home windows are thrown open for breezes to refresh musty interiors sealed for months, the financing window remains stuck and those behind the frosty glass might reasonably worry about a new Ice Age for raising cash.

It seems like only yesterday when some in biotechnology were gloating over flameouts by dot-com firms, as if to prove the Internet boom's lack of durability.

Now, however, deadline-harried pundits in the general media are slapping together comparisons between the industry and dot-coms, and the parallels seem easy enough to make. Maybe too easy.

In any case, the past year has not been good for biotechnology. Genomics' rock-like boost to the industry has run low on fuel after momentum players bailed out although it's worth noting that two of the larger financings this month have been in that sector.

Perlegen Sciences Inc., a genomics venture begun last fall by Santa Clara, Calif.-based Affymetrix Inc., completed $100 million in private financing, and plans to scan 50 genomes in about one year, using Affymetrix's whole-wafer DNA arrays. The plan is to work with entire genomes of specific patient populations provided by pharmaceutical partners, linking patterns with health factors. Included in the deal is a cross-licensing arrangement that lets Affymetrix commercialize products containing content discovered by Perlegen.

Also this month, Vancouver, British Columbia-based Xenon Genetics Inc. hauled down $45 million in a private placement for what it calls "extreme genetics," which studies the extremities of phenotypes to target cardiovascular, metabolic, neurological and ocular diseases. The money gives Xenon more than 36 months of operating revenue.

But the mood on Wall Street has been dark overall, with only feeble, brief rallies, and biotechnology stocks didn't escape the "price corrections" endured by others including some who might have believed themselves immune to the whims and vagaries of the market.

Even biotechnology shelf registrations, of which a dozen or so were made late last year, have tapered off. Last month, Alteon Inc., of Ramsey, N.J., filed to sell up to $50 million in shares. Alteon focuses on diabetes, through the advanced glycosylation end-product pathway. Earlier this month, New Haven, Conn.-based Vion Pharmaceuticals Inc. filed to sell up to 5 million shares, which would raise more than $17 million at last week's trading levels. Vion is working on cancer therapeutics and drug delivery.

For shelf registrations (or anything else), this year has been nothing like last and, of the firms filing then, only a few have cashed in. Those did it quickly. Alexion Pharmaceuticals Inc., of New Haven, Conn., which had registered for its $300 million shelf offering in October, sold 2.3 million shares to U.S. Bancorp Piper Jaffray Inc., later the same month.

Avigen Inc., of Alameda, Calif., which also filed in October, made two sales: one for $31 million and one for $62 million in November. And even waiting one month hurt New Haven, Conn.-based CuraGen Corp., which filed in October and sold 4.8 million shares at $41 per share in November. The registration had been for securities worth up to $500 million. When CuraGen announced it would go ahead with the offering, it was estimated at $260 million. Ultimately, the take was $196.8 million.

Viewed as a kind of safe haven, shelf registrations often were arranged through relationships with Acqua Wellington North America Equities Fund Ltd., which for a time took on an almost heroic patina in the industry.

Acqua chooses its companies carefully. The private equity fund with its first redemption date in 2005, backed by corporate investors from the Far East and Middle East, shops for "complicated" companies, that may have been misunderstood hence undervalued by the market. (See BioWorld Financial Watch, February 19, 2001.)

Great time to start a new biotechnology mutual fund, huh?

But that's exactly what John Hancock did last month, launching a fund that is shooting for $250 million in assets before it closes to new investors. It's down about 15 percent for March.

Andrew Arnott, Boston-based John Hancock's vice president of product management and product development, decided with the company's steering committee to start the fund, which he said makes a "nice complement" to the other funds.

"It would have been nice if we were launching it now, instead of March," he said, noting what looked like something of a market comeback last week. But, he said, the hard times will turn out to be "just a blip on the screen," and the future is likely to reward those investors who hang in.

"We'll measure the fund against other pure biotech funds," he added. "There's only a handful of those. We made a corporate investment in the fund, and it takes a little bit of time for that money to work, so at least in the first few days, we're holding more cash than we want to."

A better picture of the fund's performance will be available in early May, when the full set of April numbers is available, Arnott said.

The fund offers Class A shares with a maximum sales charge of 5 percent, Class B shares with a maximum deferred sales charge of 5 percent, and Class C shares with a maximum sales charge of 1 percent and a maximum deferred sales charge of 1 percent.

Regular accounts call for at least $1,000 invested up front, and the amount is $250 for retirement accounts.

Nondiversified, the fund may put more than 5 percent of assets into individual companies.

"We can take significant positions, as much as we want in any individual stock, although we have to conform to IRS diversification standards," Arnott told BioWorld Financial Watch. "At the high, high end, that will be maybe 15 percent in any one day, but it's going to be more like 10 percent."

As of last week, the fund's top 10 firms included well-known heavyweights and up-and-comers. They are, in order of commitment size: Amgen Inc., of Thousand Oaks, Calif.; Biogen Inc., of Cambridge, Mass.; IDEC Pharmaceuticals Corp., of San Diego; OSI Pharmaceuticals Inc., of Uniondale, N.Y.; Human Genome Sciences Inc., of Rockville, Md.; Genentech Inc., of South San Francisco; Cephalon Inc., of West Chester, Pa.; Waters Corp., of Milford, Mass., an instrument company that collaborates with biotechnology firms; Aviron Inc., of Mountain View, Calif.; and Myriad Genetics Inc., of Salt Lake City.

Although the order can change daily, "the same names will be around, I think, with some consistency," Arnott said.

Managing the fund is Linda Miller, veteran biotechnology analyst who also has managed the John Hancock Health Sciences fund, which last year showed a return of 38.22 percent, and the first quarter of this year was down 18.76 percent.

"The average fund was down 21.7 percent for that time frame," Arnott said.

Also in place for the biotechnology fund is an independent, three-person (soon to be four) advisory board put together by John Hancock. It's made up of industry experts, to advise and consult regarding developments in the industry.

"It's a mixture of people with academic backgrounds in health sciences, and those who've had hands-on experience as physicians," Arnott said, adding that John Hancock's location made the members easy to recruit. "We live in an area where there's a strong academic backbone, some of the best medical schools in the country." The same board advises on the Health Sciences fund.

Acknowledging his bias toward mutual funds, Arnott said an ever-volatile market with a current downward trend means "you really have to have your thumb on the pulse of it to invest well. Buy and hold might work, but you're taking on a lot of risk."

Especially now, risk management is the name of the game, he said.

"The unfortunate thing in this industry is that people tend to buy at the top," Arnott said. "They buy yesterday's story, and get burned by it. Right now, the sector's under a bit of pressure, but we think that provides a buying opportunity."

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