By Randall Osborne

SAN FRANCISCO - The year ahead will test even more rigorously the creativity of smaller biotechnology companies in finding sources of capital, but lesser demand for now-booming Internet stocks could mean good news for the sector, said Dennis Purcell, managing director of life sciences investment banking for Hambrecht & Quist.

"For smaller-cap stocks, it's going to be a pivotal year," Purcell told BioWorld Today, as H&Q's 17th annual healthcare conference here ended.

"It's very hard for biotech stocks to compete with Internet stocks, because they're going up so dramatically," Purcell said. "The first two quarters are going to be very interesting. There will be a lot of Internet stocks for sale. I think there could be upwards of $10 billion of Internet stock available. The question is, 'Will the Internet stocks continue on their trajectory?' If they don't, we may find people starting to look at other growth areas."

Biotechnology would be the "logical" choice, he said.

"We haven't done a great job as an industry, articulating why you have to be an investor, but we know the money's there," Purcell added.

H&Q has been urging investors to take advantage of what Purcell calls "the arbitrage opportunity," which is the gap between the value of companies, and the level at which their stocks are trading.

"What's happening and what the stock market says is happening are two different things," Purcell said, noting that some companies with successes are trading at hardly changed prices. "The astute investor is going to find where that gap is the widest," he said. "Somebody's going to make a fortune."

This means investors must be more savvy, he said, and, in general, they are.

"There's much more sophistication from the buyers," Purcell said. "They've seen the stakes, and they're much more critical when they look at companies, and that's a plus. In an era of scarce capital, you want to be sure it's allocated properly."

And, he said, there's still a chance the market will rebound.

"After the last two bear markets, in 1990 and 1994, when it looked bleak for smaller-cap companies, the stock market opened up and stocks performed incredibly well," Purcell said. "In 1995, biotech as a whole was the leading performer in the Dow Jones Index."

The smartest thing a smaller biotechnology company can do, he said, is "be able to develop a business plan that does not rely on the whims of the market to succeed. You can in-license products that generate revenues, manage the burn rate so it's not really huge, and partner-up products. But we're still searching for the right model for a company with a market cap under $150 million."

Despite the challenges, the year ahead will see some new names making money, Purcell predicted.

"A lot of these companies are going to have drugs [in later stages of development or approved]," he said. "Investors pay for drugs, and they'll pay you big multiples for drugs that are approved and are selling. We're going to see a lot of names that have not traditionally been associated with the leadership, such as Amgen or Genentech, start to get approvals. PathoGenesis, MedImmune, Coulter, Idec, Guilford - their stocks have done very well."

The H&Q conference did well this year, too, topping out at about 3,900 attendees, which is a record.

"I had an inkling it was coming, but a lot of other people at H&Q were surprised at how upbeat things were," Purcell said. "People talk about biotech being dead. It didn't look like it was dead." n

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