BELLEVUE, Wash. -- Three investment analysts speaking to aregional biotechnology conference here Wednesday agreed onone point: The biotechnology stock sector appears to be near orat its trough.

"The outlook is very, very bright, but don't expect the roller-coaster to stop," Jim McCamant, publisher of the MedicalTechnology Stock Letter of Berkeley, Calif., told a session of thePacific Northwest Biotechnology Exposition. He shared a panelwith D. Larry Smith, managing director of Hambrecht & QuistInc.'s life sciences research, and Kevin Wilson, vice president ofbiotechnology research for S.G. Warburg & Co. Inc., both of NewYork.

McCamant said that the beaten-down biotechnology stockprices have the potential to double within the next 12 to 18months. The sector's major, or tier-one, stocks have alreadybottomed, and tier-three stocks, comprising many of the recentinitial public offering (IPO) issues, should hit their lows in thenext quarter, he said.

Less enthusiastic overall than McCamant for the near term, S.G.Warburg's Wilson sees the sector continuing to climb over thelong haul. He cautioned that the sector could be hurt some day"when Amgen fails to meet expectations" of investors in theindustry's most successful company. Wilson is pessimistic aboutmany third-tier companies for whom "the reality check hasarrived."

H&Q's Smith suggested looking to public perceptions of thesector for clues to near-term direction. "It's not a matter offundamentals, but of reading perceptions," he said. Thoseperceptions have recently been at low ebb, Smith said.

"We've gone from a total belief in anything that had the name'bio' in it to total cynicism," Smith said.

He sees venture capital and other private funding sources foryoung companies, however, showing new signs of life. "Iguarantee that next year will be better. The window willreopen," he said.

The roller-coaster for the sector's publicly traded companies isreflected in the S.G. Warburg Biotechnology Index, a market-weighted average of major stocks. It nearly tripled to about 40in the year ended last January, and then rolled back to about25 by late spring.

In 1992, biotechnology stocks were hurt by a tougher overallstock market and rocked by regulatory setbacks, including theFDA's denial of approval for U.S. Bioscience Inc.'s Ethyol andCentocor Inc.'s Centoxin.

Both stocks, which had been bid up to market valuations ofmore than $1 billion, "couldn't withstand the time-line delay"on their lead products, Smith said. Investors expecting 25percent annual rates of return from companies with $1 billionvaluations need to see a reasonable expectation that a companycan attain $100 million in profits in five years - a tall order.

Wilson cited five causes of the recent events that sent thesector's stocks into decline and to their frothy upswell during1990 and 1991:

-- Regulatory approvals affecting key biotechnology drugproducts: Amgen's G-CSF in 1991 and erythropoietin in 1989.

-- A general rise in the share prices of major U.S.pharmaceutical stocks, which fueled demand for biotechnologystocks. "Investors need to find another Amgen."

-- Mergers and acquisitions that either linked majorbiotechnology companies -- such as the Chiron Corp.-CetusCorp. merger announced in July 1991 -- or large drugcompanies acquiring majority stakes in biotech companies, ledby Roche's 60 percent position in Genentech Inc. announced inearly 1990. "Mergers helped create the impression that thiswas where things were happening."

-- An $8 billion cash surge into aggressive mutual funds fromsmall investors eager to hop onboard a climbing stock market."Biotechnology took at least its fair share."

-- Enthusiasm generated by Wall Street's analysts and othersthat can ultimately prove "unhelpful in cases of small, illiquidcompanies," where a modest "sell" position quickly drives downa stock's price.

The industry's own enthusiasm in predicting productdevelopment is bringing more slip-ups in product timetablesand costing companies support among investors, Smith said.

Timing is crucial to the biotechnology stock investor, McCamantsaid. "Often the biggest money is made (by investors) before acompany makes a profit," McCamant.

Amgen Inc., which went public in mid-1983 at $18 a share,traded as low as $4 a share by late 1984, less than investorspaid during the company's last round of private venture capitalfinancing before the company's IPO. Amgen's stock, which hassince split, closed Wednesday at $67.50 a share.

-- Ray Potter Senior Editor

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

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