The setbacks for U.S. Bioscience Inc. and MGI Pharma Inc.should neither surprise investors nor be taken as a harbingerfor biotech therapeutics, even though most of the highly visibledrug flops are yet to come.

Instead, analysts predict that biotech drugs will prove to bemore approvable than conventional chemical pharmaceuticals.

An FDA advisory committee's rejection of U.S. Bioscience'sEthyol chemoprotective on Jan. 31, followed on Monday byMGI's announcement that it was suspending Phase III trials ofits MGI 136 chemoprotective, sent stocks of both companiesplunging. U.S. Bioscience (AMEX:UBS) did bounce back $1.25 onTuesday to $17 and MGI (NASDAQ:MOGN) gained 75 cents to$11.50.

"MGI and U.S. Bioscience aren't an example of what the biotechcompanies are facing," said Patricia Lea, pharmaceutical analystat Vector Securities International. The two smallpharmaceutical companies are developing new chemicalentities, which often run into side effects, she said.

It's also not widely known that MGI never conducted Phase IItrials of MGI 136, said Lea. Given that four out of five drugsnever get through Phase II, Lea estimated that MGI 136 had aneven smaller chance, about 10 percent, of surviving Phase III."So the fact that they ran into trouble isn't surprising," sheconcluded.

She still expects Ethyol ultimately to win approval.

But even if these chemical drugs don't foretell the fate ofbiotech therapeutics, investors need to be prepared for theinevitable setbacks faced by all drugs in development.

"The investing public and institutional investors haven't paidmuch attention to the normal process of trials," said analystLarry Bloom of SoundView Financial. "At the end of Phase II,you still have about a 10-to-1 risk that you won't get efficacyand safety."

Investors in large pharmaceutical companies don't hear aboutthese ups and downs because companies tend not to talk aboutdrugs until they're at the FDA, said Bloom. But biotechcompanies are showing data on Phase I trials that aren't evenstatistically significant, in part because of their need to raisecapital.

This may mean that investors will hear about more failedproducts in the biotech sector, but in fact, analysts expectfewer failures than with conventional drugs.

"The percentage of success will be much higher because of thenature of rational drug design efforts," said Jay Silverman, ananalyst with Nomura Research Institute.

"I would say that if you take all the drugs that make it to theFDA as product license applications, we'll have a higher rate ofacceptance because the toxicity will be less than usingsynthetic chemicals," Bloom said. "But because we hear about somany of these when they're still in animal models, it will feellike there are more failures."

Still, the failures will be important. "The risk is higher forbiotech companies because relative to company size, anyindividual company is only working on a few drugs," saidSilverman.

And most of the flops are still to come. "The reason initialpublic offerings have done as well as they've done is they'renot ready to make their mistakes yet," Silverman said.

All this may soon be forgotten with the next round of biotechdrug approvals. Silverman expects Xoma Corp. (NASDAQ:SOMA)and Centocor Inc. (NASDAQ:CNTO) to receive approvals for theirmonoclonal antibodies to treat sepsis by the end of thisquarter.

Among other products in the FDA pipeline that analysts expectto gain approval are imaging agents developed by Centocor andCytogen Corp. (NASDAQ:CYTO), Xoma's CD5 Plus, Chiron Corp.'s(NASDAQ:CHIR) second-generation hepatitis C diagnostic andinterleukin-2 for kidney cancer, and Factor VIII productsdeveloped by Genentech Inc. (NYSE:GNE) and Genetics InstituteInc. (NASDAQ:GENIZ).

-- Karen Bernstein BioWorld Staff

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