Survival of...Who?
For biotech's whipsawed investors, it's a jungle out there

For the past nine months, investors in biotech companies have been on a wild ride. Last fall, stock prices of biotech's top-tier companies, including Amgen (AMGN), Chiron (CHIR), and Genentech (DNA), stealthily began climbing upward. These outfits, with real products, real earnings, and deep pipelines, led the way in an all-out biotech bonanza that continued for six months.

The race between the government-led Human Genome Project (HGSI) and Celera Genomics (CRA) to finish sequencing the human genome only added to the frenzy. By Mar. 3, the biotech sector was the darling of investors, with the Nasdaq Biotech Index up 151% from early October. But the celebration was short-lived. Within weeks, the stocks had plummeted to 41% off their March highs. And even though technology stocks saw modest recoveries in May, biotech stocks are for the most part still trading sideways.

For biotech investors, these turbulent times are not likely to end soon. Genomics and other types of biotechnology are turning traditional medicine on its head. The tools to extract, organize, and use genetic information to make innovative drugs are getting better every day. ''The science is fundamentally exciting,'' says Dr. Eric M. Hecht, a biotechnology analyst for Merrill Lynch. ''But Biotech's Achilles heel is that time lines are long and risks are high.'' On average it takes decades of research to move from a promising gene to a drug that shows actual clinical benefits. Although new technologies promise to shorten this time frame, it's too soon to say for sure whether that's the case. And drugs that show promise in animals may work in people--but then again, they may not.

Estimates by PhRMA, an industry trade group, suggest that for every 5,000 compounds that emerge from discovery and animal testing, only about five perform well enough to continue on to human testing, and only 20% of those will actually make it to market.

Broadly speaking, biotech companies fall into three different categories. First are the genomics companies that sell patented genetic information and analytical tools to other biotech and pharmaceutical companies. Then there are the toolmakers, which are developing novel and innovative technologies to industrialize the medical research process. A third group of companies is intent on using the latest genetic information to make new and innovative drugs, either on their own or together with large pharmaceutical partners.

PRIME MOVERS. It's too early to say who the ultimate moneymakers in any of these categories will be. ''Right now, there are hundreds of emerging entrants with promising technologies,'' says Dr. David Blaustein, senior analyst for Oracle Partners. ''It's like the Internet was five years ago.''

That said, there are clear standouts. Biotech's blue chips, especially Amgen and Genentech, have shown investors that they can endure a rocky financial climate and still bring products to market. Scott Morrison of Ernst & Young is a big believer in what he calls ''the four early movers''--Millennium (MLNM), Human Genome Sciences, Incyte Genomics (INCY), and Celera Genomics, together with its sister company PE Biosystems. ''These companies have really shaped the genomics field and will continue to do so.''

Millennium, for example, has transformed itself in just six years from a small gene-sequencing company to a biopharmaceutical heavyweight with six drugs in clinical trials. And since its creation two years ago, Celera Genomics has snapped up technologies from several small but powerful companies, including Paracel, making it one of the leaders in computer analysis of genomic data.

Undoubtedly, some of today's tools--and their creators--will be replaced by tomorrow's technologies. Business strategies will remain fluid as companies continue to assess where they fit in a rapidly evolving industry. The biotech ride has just begun.

By Ellen Licking in New York

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