By Debbie Strickland

Special To BioWorld Financial Watch

Fall breezes appear to be cooling the biotech rally that sent stock prices soaring over the summer. As of Thursday, the Nasdaq Biotech Index was down 12 percent from the 52-week high of 669.56 achieved Sept. 10.

But that setback came after a year of spectacular gains that doubled the index's value, with a 40 percent increase between June 1 and Sept. 10.

The summer rally capped the comeback of an industry that had been in the doldrums for two years, as Internet and technology stocks climbed ever higher.

"There's what I call the sheep mentality," said Steven Kriegsman, president and founder of The Kriegsman Group, an investment banking firm in Los Angeles and San Francisco. "Everybody's hot on the Internet, everybody's cold on biotech. Now biotech's in fashion again. You've got to go through these cycles."

"I think investors in general often have a short memory," said Jon Alsenas, managing director at ING Baring Furman Selz LLC in New York. "In 1997, we really had a bad luck streak with a lot of product disappointments." In recent months, though, investors have been attracted by the "unexpectedly strong sales" at therapeutics companies, Alsenas, said, citing Amgen Inc.'s Neupogen (filgrastim), whose sales were up 12 percent to $304 million in the second quarter; IDEC Pharmaceuticals Inc. and Genentech Inc.'s Rituxan (rituximab), a non-Hodgkin's lymphoma product whose sales doubled in the second quarter to $68.3 million; and Biogen Inc.'s Avonex (interferon beta-1a) for multiple sclerosis, a product whose third-quarter sales projections were recently boosted $160 million. If Biogen meets the target, it will have improved sales 50 percent over the $107.5 million posted in the third quarter of 1998.

In light of the high margins that such approved blockbuster products can bring, the resurgence of therapeutics companies is not surprising, Kriegsman said. "Once you have a compound that's a winner, the profit margins are huge," he said. "It's a very good business to be in."

At Biogen, for example, net income (excluding a special charge) was 28 percent of revenues in the second quarter.

Still, despite the continuing flow of good news, the ebbing of the biotech tide over the past few weeks suggests that the biotech sector may have peaked, Alsenas said. "We had a good, strong, broad biotech rally, but it's ended," he said. "We're now in an interesting state of uncertainty."

Companies that will need to replenish the coffers in the next year or so would do well to seize the moment now, Kriegsman said, while biotechnology stocks are still far ahead of their lackluster performance in 1997 and 1998.

"My philosophy is always take the money when you can, not when you need it," he said, "because if you need it and can't get it, you're dead."

Indeed, the summer upswing appears to have inspired several U.S.-based therapeutics firms with good product news to take the plunge. September, particularly the second half, saw a spate of potential $50 million-plus follow-on offerings filed with the SEC:

* CV Therapeutics Inc., of Palo Alto, Calif., filed Sept. 2 for a 4 million share offering that would generate $64 million at the assumed price of $16 per share. The company also had a good summer as its shares (NASDAQ:CVTX) jumped 56 percent in one day in response to positive Phase II results for a stable angina drug called ranolazine.

* ImClone Systems Inc., of New York, filed Sept. 21 for an offering of 2.5 million shares, which, based on Thursday's close of $33.25, could bring in $83 million. The firm's shares (NASDAQ:IMCL) have jumped four-fold over the last year as an anticancer monoclonal antibody called C225 has advanced into Phase III trials, joining the company's BEC2 cancer vaccine.

* ViroPharma Inc., of Exton, Pa., filed Sept. 22 for a $70 million offering of 3 million shares at an assumed price of $23.44 per share. The company's antiviral product, pleconaril, entered Phase III trials in September for viral respiratory infection, a severe form of the common cold, following the July release of data from a Phase II study that has more than doubled firm's share price (NASDAQ:VPHM). The product is also undergoing Phase III testing for viral meningitis.

* BioCryst Pharmaceuticals Inc., of Birmingham, Ala., registered Sept. 23 for a $50 million offering of 2 million shares at an assumed price of $24.75 per share. The company's stock (NASDAQ:BCRX) jumped 40 percent on release of the news that its neuraminidase inhibitor for flu, RWJ-270201, passed a Phase II trial.

* Ilex Oncology Inc., of San Antonio, filed Sept. 24 for a $51 million offering of 3.2 million shares at an assumed price of $15.875 per share. Ilex's lead product is Campath, a BLA-stage anticancer humanized monoclonal antibody. The filing followed the Aug. 24 announcement of a marketing deal with Berlin-based Schering AG that provides Ilex and Campath joint-venture partner LeukoSite Inc., of Cambridge, Mass., with $30 million in up-front payments and milestones plus 67 percent of net profits on sales. Ilex had already raised $20 million through a private placement in July, when it acquired Convergence Pharmaceuticals Inc., of Boston.

Pharmacyclics Inc. beat the crowd by filing in mid-August, and was rewarded in late September with an $89.1 million gross, double the amount the Sunnyvale, Calif., company had proposed initially.

Whether the companies now in registration can match Pharmacyclics' success is an open question. "These financings were planned during the summer and made perfect sense," Alsenas said. "It's like predicting the weather weeks or months in advance. The past few weeks have been pretty strong, but whether or not the window will continue to be open, I don't know."

Public Markets Often Best Option For Early-Stage Firms

Convertible debt offerings in the $100 million range have been popular this year for companies with late-stage or commercialized products, and that trend showed no sign of abating in September. Affymetrix Inc., of Santa Clara, Calif., raised $150 million in a convertibles sale following a favorable ruling earlier in the month from the U.S. Patent Office in the company's dispute with Incyte Pharmaceuticals Inc., of Palo Alto, Calif. That ruling lifted shares in Affymetrix (NASDAQ:AFFX), which specializes in products for genetic analysis, by 20 percent in a single day.

Two other Bay Area firms Inhale Therapeutic Systems Inc., of San Carlos, and COR Therapeutics Inc., of South San Francisco announced plans in September to raise $100 million in convertible debt financings. Overallotment options could add $20 million to Inhale's take and $25 million to COR's.

Inhale's proposed offering came three months after the initiation of a Phase III Types 1 and 2 diabetes trial of its inhaleable insulin, partnered with New York-based Pfizer Inc. COR already has an FDA-approved product in Integrilin (eptifibatide), an anti-clotting drug for treating unstable angina and myocardial infarction, and for use in conjunction with angioplasty. On the market since May 1998, Integrilin's sales as reported by marketing partner Schering-Plough Corp., of Madison, N.J., were $15.4 million in the second quarter, a 36 percent improvement over the first-quarter tally.

Convertible financings, however, are not an option for everyone, noted Alsenas. "In many cases, [the public route] is all you can do. If you are a company that is burning significant cash and the possibility of earnings is distant, you're not a good risk for debt financing. Therefore, you've got to sell equity."

Because so many biotechnology companies fit this profile, they have a hard time standing out from the crowd and attracting investment bank attention and research coverage.

"What usually comes along with a public offering is research from the underwriting group and access to their network, which is very beneficial," Kriegsman said.

Alsenas agreed: "If you are a 'research orphan,' this definitely is one potential way to generate interest on the Street." *