The health of the biotechnology industry isn't as bad as it's perceivedto be, according to Ernst & Young's annual report on the state of theindustry released this week."The negative view has been grossly overstated," said Kenneth Lee, aco-author of the New York-based accounting firm's ninth annualanalysis, titled "Biotech 95: Reform, Restructure, Renewal.""[The view] affects the industry in stock market fluctuations and theseare interpreted that the technology has declined," he said. "There aremyriad misconceptions in details, such as cash flow. Biotechnology is ahealthy part of the American industry and it deserves substantialattention from the American public."The Ernst & Young report analyzed data from July 1, 1993 throughJune 30, 1994. It said biotechnology companies experienced a netincome loss of $4 billion, up 14 percent from the prior fiscal year.Revenues were up 12 percent, topping $11 billion, product salesincreased 10 percent to $7.7 billion, while research and developmentcosts jumped 23 percent to $7 billion.Lee said the figures also show that the public companies' net cash flowwas positive at $815 million, compared with a negative cash flow of$411 million last year."Biotech's got a bad rap," said Steven Burrill, the other author of thesurvey. "And the facts don't support it."Recent bad news has focused on well-publicized failures of drugs inclinical trials, sending stock prices plummeting. The Ernst & Youngreport showed that 82 percent of the industry's public companies havedeclined in value since the beginning of 1994.Carol Werther, of Cowan & Co. in Boston, said, "There are a lot ofpositive developments going on in the industry. There's a lot of greattechnology out there. But it's about the third year in a row that peoplehave lost money on biotech stocks in general. We might have one ortwo more years of this before we see a turn-around."Matthew Geller, of Oppenheimer & Co. in New York, suggested themarket is going through the initial phase of differentiation ofcompanies. "People are seeing the industry less as a group and more asindividuals," he said. "The bundle theory is dying; that idea where youjust buy 20 companies. The majority of products do not succeed."Lee said that in the coming year the biotechnology industry "willbenefit from the market place realization that companies areundervalued."The Ernst & Young analysis found that the outlook for new products isstrong in the coming year and companies are restructuring and creatingmore alliances to reduce expenses.As one measure of the industry, the report compares all biotechnologycompanies to Merck & Co., of Whitehouse Station, N.J."The whole biotech industry is about the size of one drug company andif you look at biotech in comparison, it shows there's plenty of upsidein terms of potential market value growth," Lee said.Merck's revenues last year were more than $10 billion compared with$11 billion for biotech companies, but biotech companies spent seventimes as much as Merck for research and development _ $7 billionversus $1.2 billion."The whole pharmaceutical industry sells $125 billion in drugs and hasa market capitalization of $200 billion," Lee said. "The biotechindustry is selling $11 billion in drugs and is worth $40 billion. It's notunreasonable to assume that by 2000, half the drugs on the market willbe biologics. That says biotech is small enough for plenty of marketvalue growth."According to the Ernst & Young report, there are 1,311 biotechnologycompanies, 39 more than in fiscal 1993, and the industry as a wholeraised $4.7 billion, compared with $4 billion the previous year. Of thetotal companies, 265 are public.The report's public company survival index, a comparison of cash onhand and spending rate, declined from 34 months to 25 months. Fiftypercent of the industry has enough capital for no more than two years,26 percent can expect to last less than a year at their current burn ratesand 22 percent have enough money for five or more years. n

-- Charles Craig

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