By Nancy Volkers

Special To BioWorld Financial Watch

The biotech industry rises and falls. In March, it fell hard, partly because President Bill Clinton and British Prime Minister Tony Blair said that data from the map of the human genome should be made available free to the public.

Since then, it has risen to its feet again, although it has staggered around quite a bit. Market caps dropped precipitously until June, when they shot up again. By mid-July, many stocks were back close to their mid-March peaks. Overall, the market led by genomics companies has performed very well over the past year.

While retail investors may feel queasy at the first sign of a drop, moving money in and out of biotech, asset management firms ride these trends with a longer-term perspective, still trying all the while to weed out the most promising biotechnology and pharmaceutical companies from the ever-widening circle.

Extensive changes have occurred in biotech over the past decade. Asset managers follow these trends closely, and certainly feel the market's volatility; however, their investment strategies seem to have remained on an even keel.

"The industry has changed dramatically," said Sven Borho, general partner at OrbiMed Advisors in New York, a specialized asset management group. "In the mid-1990s, the field was left alone. Really, only over the last year, has there been a major push in biotech. Now, investors outside the specialty have discovered it. The sector is on the map for the retail investor."

Isser Elishis, managing partner and chief investment officer at Acqua Wellington Asset Management LLC, agreed. "What's happening is that the biotech market goes in rotations," he said. "It was super-quiet from 1996 to 1998, and now people are rotating out of the Internet into biotech."

Acqua Wellington, based in New York, has been active since the March downturns. Most recently, it closed a deal with Axys Pharmaceuticals Inc., of South San Francisco, that could bring Axys as much as $50 million.

Axys raised $31.5 million in a private offering in March. In April, it gained a $60 million equity interest in Discovery Partners International (DPI), which filed for an initial public offering (IPO) in May, aiming to raise $115 million.

Good news for Acqua Wellington, and right up its alley, said Elishis.

"We try to pick larger small-cap and mid-cap companies that we believe that market is not valuing properly," he said. "For example, Axys owns a large stake in DPI, which is going public this coming week. Their DPI stake makes up 50 percent of their current market capitalization."

The key criterion, Elishis said, is the company's management team. "The companies we've invested in have strong, [veteran] management teams with people who've been around for 20 or 30 years. Management is key in this business. It's the same way in the Internet. People who never worked a day in their lives and expected to start an Internet company had it go into the garbage. In biotech, the way to bet on the strong side of the coin is to bet on strong management teams. Evaluations might fluctuate, but you know those companies are not going to go anywhere."

Since March, Acqua Wellington also has signed deals with Genelabs Technologies Inc., of Redwood City, Calif. ($29 million); Ariad Pharmaceuticals Inc., of Cambridge, Mass. ($75 million); Aviron, of Mountain View, Calif. ($84 million); GelTex Pharmaceuticals Inc., of Waltham, Mass. ($35 million); and Isis Pharmaceuticals Inc., of Carlsbad, Calif. ($27 million).

The spring market volatility didn't faze Acqua Wellington. In fact, Elishis said, "We like a little volatility. It allows us to make investments at more reasonable valuations." Even currently, he said, many mid-cap companies are still undervalued, meaning that money is harder for them to come by.

"There isn't a lot of good capital for the small- to mid-cap companies," Elishis said. "We see our niche as finding the good companies that we can help grow up." Ultimately, he said, "We're trying to pick a maximum of 30 companies" currently, Acqua has 15 companies in its portfolio "and give them the funding to be able to deal with their 'teen years.' We want to essentially pay for their clothes and their first car. In the interim, hopefully they'll have a spin-off, like Axys, and that'll allow them to sell themselves at a higher valuation."

OrbiMed, which advises five funds with a total value of approximately $1.5 billion, is relatively broad in scope and holds approximately 40 percent of its assets internationally, said Borho.

"We invest from the very smallest biotechs to the biggest pharmas. We have in all our funds a blend of geographic diversification and a diversity of market caps," he said. "Our style hasn't changed, but some of the technology has. A lot of these first-generation biotech companies that became public in 1990 and 1991 are like yesterday's news." Some of the most intriguing companies now, Borho said, are private.

OrbiMed invests in many private companies, some of which then go public. "For example," Borho said, "We started buying [Caliper] in private rounds, bought in the IPO and continued to buy them. We have been focusing on more of the newer technology companies. We like companies that are 18 months to two years before regulatory approval or two years within their latest regulatory approval. That's our sweet spot."

Since March, OrbiMed has participated in two mezzanine-round financings, with Acadia Pharmaceuticals, of San Diego, as well as a $28.6 million deal with Ciphergen Biosystems Inc., of Palo Alto, Calif.

Despite some predictions that the maturing of biotech will impose strong natural selection on smaller, start-up companies, Borho said that money is still out there.

"For new companies, I think there's a lot more money for private rounds," he said. "There are more good deals. If you're a good company, it's not so difficult to raise a lot of money in private rounds. The time span to becoming a public company has dramatically shortened. Ciphergen did a private round and filed [for an IPO] right after that."

Looking to the future, Borho sees a very definite maturation in the biotech industry, led by more reasonable valuations and plenty of high-quality, undervalued companies.

"When Internet companies were very hot, and I saw all the struggles of analysts valuating companies they were coming up with all sorts of models it gave me a déjà vu from 1990-91," he said. "Back then, everyone was coming up with these mumbo-jumbo ratios because no one could value biotech companies, and in fact, all of them were overvalued. Now it's more pragmatic.

"You can still find companies at modest valuations that are not expensive," he said. "There's so many high-quality companies around. The number of prospectuses coming across my desk is amazing. We just have to be worried about the killing of the biotech bull again." *

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