Conventional wisdom has it that Cephalon Inc.'s Myotrophin openedthe financing window of 1995-1996. After that company announcedpromising data about its drug for Lou Gehrig's disease last June,biotechnology companies saw the end of a bitter financing drought.By August, the proverbial window had swung wide open.

However, events since then suggest that biotechnology stock pricesand the appeal (or lack thereof) of biotechnology equity have a lotless to do with sector-specific news than they do with general marketconditions. Mutual fund inflows and low interest rates likely havebeen the real foundation of the current financing boom.

Further proof of the general market hypothesis: the biotech rally didnot lag for a minute when Myotrophin suffered a setback earlier thisyear (in January, the FDA unexpectedly asked for more data on thecompany's treatment investigational new drug application).

So when small capitalization stocks _ including many biotechnologystocks _ took a dive last week and mutual fund managers reported aslowing down of cash inflows, many industry insiders began askingthat age-old question: Is this the beginning of the end? The marketfor biotechnology equity has been roaring for a full year now. SinceJune 1995, initial public offerings (IPO) and follow-on offerings haveraised more than $5 billion.

But in recent weeks, several offerings have been withdrawn and manyfollow-ons completed well below the stock price on the filing date(See chart on page 6). According to BioWorld Financial Watch, theaverage stock price of the 260-odd companies in the biotechnologysector has dropped a total of 8 percent in the last two weeks.Although prices are still up an average of 32 percent for the year,that's down from a peak average gain of 49 percent in late May.

Despite the recent signs of weakness, after-market performance ofIPOs is still impressive _ at least in the aggregate. Approximately 53companies have gone public since June 1995 and the average stockprice of these new issues was up 27 percent as of June 28, 1996.Performance like that could continue to attract investors even thoughmany analysts conceded that the market is glutted with offerings.

The other driving factor behind interest in new issues is, of course,the record-breaking cash inflow into mutual funds. In the first fivemonths of 1996, panicky baby boomers planning for retirementpoured $124 billion into stock funds. As a point of comparison, fundsreceived a total of $128.9 billion in all of 1995 and in 1993, thebiggest year ever, funds received about $129.6 billion. Clearly, 1996will break all the records.

Investment bankers have scrambled to meet that unprecedenteddemand by underwriting firms at earlier stages of development,according to Tom Tirney, an analyst at Standard & Poors, in NewYork. "There are so many sell siders out there doing deals, I thinkthey are going to do it to death," he told BioWorld Today. "There'sonly so much money out there for these type of speculative stocksand the science behind these companies is hard to understand, evenfor experts."

Tirney said that the unabated flow of IPOs could "spoil the market"and send investors fleeing from early-stage company stocks to"quality companies with revenues." In the meantime, he predicts thatinvestors left holding speculative stocks will see valuations go downdramatically. "Even though the industry's fundamentals as a wholehave never been better, the majority of individual companiescomprising this industry still have really spotty fundamentals," saidTirney. "This window is closing up and it's probably a good time toopt out on IPOs."

David Stone, a sell-side analyst at Cowen & Co., in Boston, concededthat the biotechnology sector has had a downturn of late but insistedthat the industry's strong fundamentals will save the day.

"I don't think this downturn will last because the fundamentals in thesector are stronger than they've ever been _ more products arecoming to market and more companies are transitioning fromdevelopment stage to operating stage than ever before," he said.Cowen currently is managing several offerings in registration.

What kind of event could snap biotechnology stocks out of thisslump? Stone said "quality Phase III results or an unexpectedly quickFDA approval" could catch investors' attention later this summer.One wild card, however, is interest rates. If they rise, stocks couldsuffer across all sectors as investors gravitate toward money marketfunds and certificates of deposit. n

-- Lisa Piercey Special To BioWorld Today

(c) 1997 American Health Consultants. All rights reserved.