By Randall Osborne


The lyrics of an old Kenny Rogers song tell how the gambler needs to know when to hold 'em and when to fold 'em. Players in the biotechnology sector must be humming that tune rather a lot these days. When they're not screaming.

Analysts have been singing a certain kind of song, too. It's a melody that celebrates the virtues of holding on for the long haul, understanding the industry's tendency to grow slowly two steps forward, one step back. Investors, according to this music, are wise to accept the nature of the game before they put their money down . . . and then to grit their teeth and keep betting.

But it's getting bad. Really bad.

In a market that's depressed overall, the Nasdaq Biotechnology Index was down another 15 percent for the week ending Thursday, continuing its spiral. The index, made up of companies with a market capitalization of at least $200 million and stocks no less than $10 per share, with an average daily trading volume of 100,000 shares or more, is viewed as one reliable barometer of industry health. It fell 28 percent, from 947.34 to 684.11, between March 1 and March 22. It rebounded slightly Friday, closing at 712.52.

As if anybody didn't know.

"This is the worst I've seen," said Sharon Seiler, head of biotechnology research for Punk, Ziegel & Co. in New York. Seiler, an analyst since 1994, missed the hard times earlier in the 1990s and is glad of it.

But biotechnology investing today "is not exactly an uplifting topic," she said.

On the other hand, Seiler sought to discourage hand wringing and sell-outing.

"It's hard to say to somebody right now, 'Step up and buy this stock,'" she told BioWorld Financial Watch. "A lot of the people I talk to are dedicated biotech investors, and they're sitting on the sidelines with their cash. They identified things they thought were cheap a few weeks ago, and they're even cheaper now. Everyone's afraid to pull the trigger."

As reluctant as anyone to try guessing how far away the true bottom might be for biotechnology, Seiler offered the customary and widely shared reassurance that the deep doldrums are "not related to the fundamentals in biotech. It's more related to what happens in the market as a whole," she said. "Most companies with credible technology or research took advantage of the market last year to raise money, and a lot of them are in reasonably good shape."

However, Seiler added, she is "alarmed, because [biotechnology] could continue to go down for 'technical reasons,' for lack of a better term. Amgen's down something like 11 or 12 points in the last two days," she observed Thursday. "That was a real mark of concern for me."

Thousand Oaks, Calif.-based Amgen Inc. wasn't the only heavyweight losing ground. Genentech Inc., of South San Francisco, also suffered, despite positive Phase III trial news with Veletri (tezosentan), which the company is developing for heart failure with the Swiss biotech company Actelion Ltd. Another big name to drop was Biogen Inc., of Cambridge, Mass.

In more ways than one, Seiler noted, the situation now resembles last year's heyday, in reverse. "Last year was scary in its own way, because you had the sense that evaluations were not tied to fundamentals," she said. "Just like now."

While, in one sense, biotechnology stocks are carried along on an unfavorable market tide, in another sense, the sector is apart from the trend, Seiler said.

"Development-stage companies are almost independent of the market, because they don't have anything to sell," she said. "But even the larger-cap companies, with marketed products, are not selling discretionary drugs. If you're in the emergency room, having a heart attack, you don't say, 'Gee, my 401(k) is down, so don't give me that Activase.'" The drug (alteplase) is Genentech's thrombolytic agent for acute myocardial infarction.

Scott Sacane, managing director of the Perseus Soros Fund in New York, said the fund is looking for specific criteria when it selects companies in which to invest: market valuations two times the available cash, with multiple products that are Phase II or later, and balance sheets that need not finance for three years.

"We haven't seen many of those opportunities in the last 18 to 24 months," Sacane told BioWorld Financial Watch, but lately, they have been "multiple. We've got 15 in our crosshairs. Nine months ago, there would have been none," he said.

"That's making us pretty excited about the sell-off, but it's certainly not a time to be throwing money at biotech companies," Sacane said. "We're certainly not of the mind that we're going to be allocating capital in a big way to the biotech sector."

For investors, he said, "the danger is looking at companies and saying [its stock is selling] at $10 down from $50, and that's got to be a bargain. The risk is looking at the carnage and not being able to distinguish" the truly valuable companies which requires the same careful analysis that it always did.

Eric Roberts, managing director and co-head of global health for Lehman Brothers Inc. in New York, noted biotechnology "was the last sector to go up at the end of the longest bull market in history, and now it's the last sector to go down," as the market drifts into the "bear" zone.

"Genomics stocks created the interest in late 1999 and 2000, and they dragged the sector up," Roberts told BioWorld Financial Watch. "Those stocks are very difficult to value," he said, like almost all of the earlier-stage firms. "You had to value them against each other."

That's changing. In 1999, Roberts said, 13 U.S. biotechnology firms were profitable. The number rose to 18 in 2000, and will reach 26 this year, with 33 expected in 2002.

"It's the first generation of biotech, finally delivering on the promise," he said. "A year ago, a lot of [pharmaceutical companies] were looking at biotech, and couldn't make the numbers work, in terms of acquisitions, but everybody's talking about who they should acquire now."

Meanwhile, those attractive first-generation firms that "have done a good job of getting products close to market [are] getting whipsawed in this valuation whirlwind," Roberts said.

Most investors came into the sector during the past couple of years, after what Roberts called a "shakeout" in the 1990s. They are confused. "People who have been around for five or 10 years are few and far between," he said.

But the increasing number of firms with late-stage research will make them easier to judge, Roberts said. "Smart investors knew the new investors had unrealistic time lines and probabilities for genomics stocks last year, but even neophyte investors can evaluate first-generation biotech stocks based on near-term earnings estimates," he said.

The market downturn facing investors at the moment, though, may obscure what's potentially lucrative, Roberts said.

"I look at it and say it's not a good thing for biotech, because the volatility scares investors, and may cause people to shun it," he said. "The good news is, we raised a lot of money, and it will take a while for the companies to burn through that cash. We're telling them to sit tight, and work on their business, and tell investors there is no cause for alarm."

For investors, Roberts said, "this is a short-term opportunity to make a long-term bet." Seiler's advice, too, resembles that of the two-fisted gambler who's down on his chips and refuses to quit. An eye for the bigger picture is critical now, she said.

"It's a good time to buy," Seiler said.

But when will proof arrive that the time to buy was good? The next quarter or two may not bring cause for great optimism, she warned. "That's a hard call, that's the black box," Seiler said. "I don't know what makes it turn around."