By Jennifer Van Brunt


The continuing volatility of the stock market has taken a heavy toll on many sectors of the economy, but the stocks of companies with market capitalizations of less than $1 billion — the small-cap stocks — have been punched down time and time again.

Toward the middle of last week, however, various analysts who follow these trends were beginning to predict that the bottom had finally been reached. In fact, they have gone even further, forecasting that mutual fund managers and institutional investors may actually start buying small cap stocks because they are now so cheap.

If that's the case, then biotechnology stocks should qualify as ideal candidates. The majority of the stocks in this sector are vastly underperforming — relative to the general market and relative to their own individual highs.

Sinking Stocks

In fact, biotech stocks have been in freefall since the beginning of May. Of the 314 biotech and biotech-related stocks that currently comprise BioWorld Financial Watch's universe, the average stock hit its highest trading price on May 8; at that time, the average stock was trading 13 percent higher that its Dec. 31, 1997, closing price. Since then, however, there's been a significant erosion. By August 7, the average stock was trading 14 percent below its 1997 closing price. The stocks as a group went into negative territory at the beginning of June.

If one looks at the performance of the Nasdaq Biotech Stock Index, however, a different picture emerges. Whereas the BioWorld Stock Indicator shows a steadily sinking ship, the Nasdaq Biotech Index depicts one that is being tossed about in the seas created by a prolonged and heavy storm.

The Nasdaq Biotech Index, which is market-value weighted, currently comprises 145 stocks. The representation of each stock in the index is proportional to its closing price times the total number of shares outstanding, relative to the total market value of the index. The index hit its high point on March 20, 1998, up about 11 percent from its 1997 closing value. Since then, it has dropped by slightly more than 7 percent, but it is still up about 4 percent from its year-end 1997 value.

The differences in the two measures of biotech stock performance might be due to the number of individual issues contained in each, or perhaps to the particular companies that comprise each list. (See the graphs on p. 9 for details.)

Not since 1994, when BioWorld Financial Watch started tracking these movements, have the biotech stocks performed so poorly. In 1994, the 252 biotech and biotech-related stocks on the BioWorld list ended the year an average of 32 percent lower in price than their closing prices in 1993. Of those 252 stocks, a full 81 percent dropped in dollar value during the calendar year. Only 45 biotech stocks came out of the year priced higher than they had been when they went in.

In 1995, the stocks underwent a remarkable transformation. Between the first and the last days of the year, the average stock gained 96 percent in value. (At the end of 1995, there were 251 companies in BioWorld's universe.) Not once during the entire year did the average trading price fall below its previous year's closing value.

In 1996, biotech and biotech-related stocks held their own: Of the 286 companies then on the list, the average stock gained 18 percent in value over the course of the calendar year. Again, the average change in value never dropped below zero.

In 1997, however, the stocks started to misbehave. They gained significantly in the first two months of the year, then plummeted by early May to an average 15 percent below the Dec. 31, 1996, closing price. The 302 stocks included in the universe at that point struggled back up and reached high ground again by mid-October 1997 — just as the financial crisis in Asia exploded. Since then, the biotech stocks — as well as many other sectors of the economy — have been hard put to recapture any of their former sheen.

Public Offerings Wither

This lack of support from the capital markets for biotechnology stocks has affected more than just stock prices of individual companies, of course. Some companies that had been attempting to complete initial public offerings (IPOs) did manage to squeak through the very narrow window in early July.

These include Abgenix Inc., the 40 percent-owned subsidiary of Cell Genesys Inc. (NASDAQ:CEGE). Abgenix (NASDAQ:ABGX) managed to price its shares on July 2, but had to scale back the offering both in number of shares (from 3 million to 2.5 million) and price (from a proposed range of $10 to $12 per share to the final price of $8 per share). Still, even though it might have been difficult to round up investors, the Foster City, Calif., developer of antibody-based therapeutics did manage to sell all the extra shares set aside to satisfy the overallotment option, bringing gross proceeds up to $23 million.

Another IPO that made it to market in early July was that of San Diego-based Collateral Therapeutics Inc. The company (NASDAQ:CLTX), which is developing gene therapy treatments for cardiovascular disease, also was forced to whittle away the number of shares and the share price in order to finally complete its IPO.

On the other side of the Atlantic, transgenic company Pharming Group NV appeared to have no such trouble with its IPO. Pharming, based in Leiden, the Netherlands, came public on Easdaq (PHAR) by selling as many shares as it had planned (4.1 million) and pricing them at the top of the range.

But most IPO-hopefuls have since abandoned all pretenses of waiting for the good times to return. The most recent dropouts include Rockville, Md.-based gene therapy specialist GenVec Inc. and Dyax Corp. Dyax, of Cambridge, Mass., has developed a high-throughput technology platform — phage display technology — that has broad potential commercial applications.

Interestingly, while most of those companies that had been in registration for IPOs since the spring of 1998 — or even since the fall of 1997 — have withdrawn their offering prospectuses, still others have popped up with new filings. These include Centaur Pharmaceuticals Inc., of Sunnyvale, Calif., which is developing nitrone-related therapeutics for treating diseases involving oxidative stress. Centaur, however, plans to list its shares on the Swiss Stock Exchange only, thus avoiding the volatile U.S. markets entirely. Another recent filer is Stamford, Conn.-based Lifecodes Corp. The company, which provides DNA testing services for human paternity and forensic identification, plans to use some of the proceeds from the proposed IPO to complete its acquisition of fellow testing specialist GeneScreen Inc., of Dallas. Also seeking a stock listing is Albany Molecular Research Inc., which offers chemistry research and development services to biotech and pharmaceutical companies. The Albany, N.Y., firm's outsourcing services include medicinal chemistry, analytical chemistry and small-scale manufacturing.

Perhaps these companies, and their various underwriters, are predicting a post-Labor Day rally in the stock market that will spark investors' interest in new offerings. Or perhaps those investors are already starting to eye the biotech sector, which is chock full of bargains.