By Debbie Strickland

Special To BioWorld Financial Watch

Biotechnology stocks enjoyed a spectacular run in 1999, with the Nasdaq Biotech Index shooting up 102 percent and outpacing even the stellar 86 percent gain in the Nasdaq Composite Index for the year.

Individual biotech stocks of sought-after companies jumped three- to seven-fold, and money raised by the sector more than doubled in 1999 to $11.3 billion. Of course, South San Francisco-based Genentech Inc. swallowed $5.3 billion of that through two public offerings, but even excluding the Genentech factor, the industry raised about $6 billion 17 percent more than in 1998.

A key question for the industry as it heads into the 18th annual Chase H&Q Healthcare Conference this week: Can this momentum last and, if so, for how long?

"This is a market unlike anything we've seen in biotech," said Peter Feinstein, chairman of the public relations firm Feinstein Kean Healthcare. An executive in the industry since the early 1980s, Feinstein recently launched a venture fund focusing on firms in Cambridge, Mass.

In particular, he said, "The performance of the genomics stocks is unlike anything else we've seen before in the history of the industry." The upsurge of stocks in the subsector "indicates there's a lot of smart money moving into these genomics stocks. We're following 13 stocks in this sector, and their performance has just been phenomenal," he said, noting such stars as Affymetrix Inc., of Santa Clara, Calif.; CuraGen Corp., of New Haven, Conn.; and Celera Genomics, of Rockville, Md. (See BioWorld Financial Watch, Jan. 3, 2000, p. 1.)

He expects investor enthusiasm for biotech, and especially genomics, to continue, with happy implications for companies seeking financing. "Obviously, there's a shortage of genomics stocks. With these valuations as high as they are, clearly there is logic to say ought to be more companies."

The IPO market will likely be led by genomics companies, Feinstein predicted. Currently, two genomics companies Sequenom Inc. and Diversa Corp., both of San Diego are seeking to go public. Fellow genomics firm Maxygen Inc. raised $110.4 million in a December initial public offering. The Redwood City, Calif., company sold 6.9 million shares at $16 per share (including the underwriters' overallotment option). The shares (NASDAQ:MAXY) have traded as high as $82 and closed Friday at $57.313.

Celera Genomics is another company that went public in 1999 and achieved stellar valuation growth for shareholders. Headed by J. Craig Venter and promising super-fast sequencing of the human genome, Celera went public in May through a distribution of stock to shareholders in parent company PE Corp. As of Friday, the stock (NYSE:CRA) had ratcheted up 777 percent to close at $186.937.

"Genomics has caught people's imagination," said Jon Alsenas, who is managing director at ING Barings Furman Selz LLC in New York. "We're seeing the 'internetization' of the sector, where suddenly the fundamentals are becoming uncoupled [from valuations]."

Sequencing and other early-stage research, of course, is only the tip of the iceberg in producing a new generation of therapeutics. Alsenas cautioned, "It's one thing to have all the names in the phone book, and another thing to have the numbers."

He added that biotech is a cyclical business, with rallies, followed by downturns when a few setbacks, usually clinical, remind investors of the inherent risk in biotech.

"Every single time, it's people correctly identifying these technologies as promising and ignoring the very real risks. Then suddenly, if something goes wrong, there's a swing in the other direction. It's like the stock market suffers bipolar disorder."

For example, investors could get spooked, if Amgen Inc., of Mountain View, Calif., loses its patent battle against Cambridge, Mass.-based Transkaryotic Therapies Inc., which has advanced into Phase III trials a gene-activated erythropoietin for anemia related to renal disease. If approved, the product would challenge Amgen's Epogen (Epoietin alfa), which produced $1.38 billion in sales in 1998. A trial is slated for April 2000.

"If TKT defeats Amgen in the patent field, does that make people suddenly think patents are not as strong?" Alsenas wondered.

Biotech is usually flat or down in the first quarter, he said, noting "there's gravity." The Nasdaq Biotech Index was down as much as 16 percent last week before rebounding and hitting a new high Friday.

Peter Ginsberg, an analyst with US Bancorp Piper Jaffray Inc. in Minneapolis, expects some of the same drivers of last year's upswing will continue over the next few months, with the first quarter "very active" for IPOs.

"What drove the stocks higher last year were two things primarily," he said. "First, a number of the high-profile biotech products did extremely well in the market, and that reminded investors of the potential.

"Second, there was a surge of acquisition activity in 1999 and that also drove up stock prices. When investors see a lot of acquisition activity, many seek to find the next company to be acquired. The average company that was acquired was up 44 percent in stock price from the month before acquisition to after it was announced."

Among the companies commanding acquisition payouts of more than $500 million were the following:

* Centocor Inc., of Malvern, Pa., acquired by Johnson & Johnson, of New Brunswick, N.J., for $4.9 billion.

* Agouron Pharmaceuticals Inc., of La Jolla, Calif., acquired by Warner-Lambert Co., of Morris Plains, N.J., for $2.1 billion.

* Sugen Inc., of Redwood City, Calif., acquired by Pharmacia & Upjohn, of Peapack, N.J., for $650 million.

* LeukoSite Inc., of Cambridge, Mass., acquired by Millennium Pharmaceuticals Inc., also of Cambridge, for an estimated $635 million

* Sequus Pharmaceuticals Inc., of Menlo Park, Calif., acquired by Alza Corp., for an estimated $580 million.

* U.S. Bioscience Inc., of West Conshohocken, Pa., acquired by MedImmune Inc., of Gaithersburg, Md., for $529 million.

The two types of companies likely to make attractive targets, Ginsberg said, are those that are late-stage or already commercial and those that have retained a large portion of downstream profits, 50 percent or more.

"Those companies that are likely to be acquired are probably some of the better investments for 2000."

Venture Capitalists Looking For Biotech Deals

What about companies with a few employees and a great idea? According to Feinstein, "The venture capital business is heated. . . . . There is a large amount of money from venture capital sources."

Princeton, N.J.-based Orchid Biocomputer Inc., for example, raised $72 million last week in what was said to be the "largest ever" private placement for a private biotechnology company. Orchid's technology base centers on pharmacogenomics and microfluidics. In September, the company launched SNPstream for industrial-scale single nucleotide polymorphism (SNP) genotyping.

While biotechs have long envied the financing success of dot-coms and other high-technology firms, Feinstein noted that the venture capital available for healthcare "stayed stable" the funding just didn't keep up with the growth in funds available for high-technology.

Indeed, the $1.1 billion raised by private biotechnology firms in 1999 was virtually unchanged from the 1998 total, which, incidentally, was nearly 40 percent higher than the 1997 total. (Source: BioWorld Financial Watch's weekly tracking of money raised by biotechnology companies.) *