Editor's note: The following is an excerpt from thisweek's issue of BioWorld Financial Watch. For a copy ofthe complete article and accompanying charts call (800)879-8790.

The dizzying ascent of biotechnology stock prices in thelast three months _ coupled with the rapid-fire pace offollow-on stock offerings _ has created the kind ofeuphoria that members of the biotech community haven'texperienced in years.

The stocks as a group have increased in value by close to80 percent (on average) from their 1994 closing prices,according to BioWorld Financial Watch's records. Thefollow-on stock offerings have been greeted withunbridled enthusiasm by investors. Especially in the lastmonth or so, all these offerings have been oversubscribed,garnering huge bundles of cash for the companies thathave taken their stories to The Street _ and for theinvestment banking firms that have served asunderwriters for those offerings.

But as long-time observers of and participants in thisvolatile sector know all too well, no financing windowstays open forever. In fact, timing is everything: Nocompany wants to get caught in the middle of a roadshow when the window slams shut. The key, of course, isto be able to analyze the factors that are contributing tothe current surge in enthusiasm for the biotech sector andto predict when those investor passions may start to cool.

The dramatic increase in biotech stock prices andfinancing activity has attracted the interest _ and money_ of many conservative health care investment groupswhich had held back during the bad times as well as asignificant number of momentum players that are in for aquick fix. But biotechs also have received significantbacking from their most ardent and long-term supporters:investment banking firms that are truly interested in thefundamentals of the companies they help to finance.

Some of the momentum players are coming from thetechnology sector. Having made huge gains off computerhardware and software stocks during the past six months,they are now hoping to catch the biotechnology wave, aswell. "Some of the technology portfolios are taking theirprofits and investing them in health care and biotech,"commented David Stone, a managing director at Cowen& Co. in Boston. "Some momentum players are lessconcerned with the fundamentals [of biotech] but theinference that they don't know what they're buying isn'tnecessarily correct," Stone told BioWorld FinancialWatch.

In fact, said Stone, "A lot of the upsurge [in biotechinvesting] is being driven by fundamentals, not justmomentum. We're seeing some familiar faces that wehaven't heard from in several years." These areaggressive growth funds and investment portfolios thathave had an interest in health care but not necessarilybiotechnology _ and have come back to the sector nowthat the fundamentals look better.

Just what are those fundamentals? For one, thepreponderance of positive clinical trial data coming fromthe biotech sector is once again reinforcing the belief thatbiotech drugs can work _ and that the companiesdeveloping those drugs have the potential to become hugesuccesses in the commercial arena.

In particular, West Chester, Pa.-based Cephalon Inc.'smid-June announcement of positive Phase III trial resultson Myotrophin, its drug for treating amyotrophic lateralsclerosis, seems to have sent investor confidence levelssoaring. It certainly propelled Cephalon's stock upwards_ as well as the stocks of many other companies in thesector.

"We saw a real turn in the psychology of the market [inlate April] when we raised more money than we set out toin [Princeton, N.J.-based] The Liposome Co. Inc.'sfollow-on offering," said Dennis Purcell, the managingdirector of investment banking at Hambrecht & QuistLLC in New York. That was reinforced by the release ofCephalon's data, he added: "The stock doubled in oneday."

Stone cites other fundamentals that are contributing toindustry strength: With the FDA working to lowerproduct development hurdles, the regulatory environmentis looking favorable; and big pharmaceutical companiesare continuing to find real value in biotechnologycompanies (even if the markets don't) as evidenced by therapid and still-increasing pace of new collaborativeagreements. n

-- Jennifer Van Brunt Editor

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

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