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7-Business: Biotech's dismal bottom line: More than USD 40 billionin losses



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TITLE:  Biotech's Dismal Bottom Line: More Than USD 40 Billion in Losses
SOURCE: Wall Street Journal, USa, by David P Hamilton
        posted by the National Association of Seed and Venture Funds, USA
        http://www.nasvf.org/web/allpress.nsf/pages/8975
DATE:   20 May 2004 

------------------- archive: http://www.genet-info.org/ -------------------


Biotech's Dismal Bottom Line: More Than USD 40 Billion in Losses
As Scientists Search for Cures, They Gobble Investor Cash; A Handful Hit
the Jackpot
'The Ultimate Roulette Game'


Preview:
Since the first biotechnology company went public a quarter-century ago,
stock-market investors have put somewhere close to USD 100 billion into
the industry. The results so far: More than a hundred new drugs and
vaccines, several hundred million people helped by biotech medicines --
and cumulative net losses of more than USD 40 billion for the industry's
public companies.


Article:
Since the first biotechnology company went public a quarter-century ago,
stock-market investors have put somewhere close to USD 100 billion into
the industry.

The results so far: More than a hundred new drugs and vaccines, several
hundred million people helped by biotech medicines -- and cumulative net
losses of more than USD 40 billion for the industry's public companies.

Biotechnology, which harnesses the science of genetics to develop
medicines, may yet turn into an engine of economic growth and cure deadly
diseases. But it's hard to argue that it's a good investment. Not only
has the biotech industry yielded negative financial returns for decades,
it generally digs its hole deeper every year.

This often gets lost during periodic bursts of enthusiasm for biotech,
one of which is under way right now. After a three-year slump, biotech
companies raised USD 1.5 billion from new stock offerings in the first
quarter of 2004, almost three times the level of a year earlier.

The buzz surrounding these stocks reflects the unusual role that biotech
has come to play in finance and medicine: a casino that sends capital to
otherwise neglected high-risk corners of research -- and rewards a very
few with huge paydays.

Home runs in biotechnology are scarce, but they can be lucrative. A USD
1,000 investment in Amgen Inc. at its initial offering in 1983 would now
be worth almost USD 150,000. During a brief biotech-stock bubble in 1999
and 2000, a well-timed investment in unprofitable Human Genome Sciences
Inc. could have yielded an 11-fold return in just eight months. The
company's shares have since fallen almost 90% and in 2003 it posted a net
loss of more than USD 185 million.

 "Biotechnology is the people's lottery," says Thomas Eadington, a
medical-technology entrepreneur turned investor in Newport Beach, Calif.
"It's like the ultimate roulette game. If you hit it, the returns are
astronomical."

A few biotechnology companies have achieved undeniable success. Amgen,
the most successful biotech to date, earned USD 2.3 billion in net profit
last year. Its nearest rival, Genentech Inc., earned USD 563 million.
Overall, however, publicly traded biotech companies in the U.S. posted a
net loss of USD 3.2 billion in 2003, thanks to vast research and
development spending.

The biotech industry traces its origins to the mid-1970s, when Genentech
created a scientific sensation by splicing genes into bacteria to produce
human proteins. Since then, the term biotech has generally referred to
such "genetic engineering." Scientists insert a stretch of synthetic or
human-derived DNA into living cells, which then interpret that genetic
code and produce large amounts of a protein useful in treating diseases.

Enormous investments in biotech have made possible the industry's medical
breakthroughs. These include proteins that help the blood clot -- a boon
for hemophiliacs -- as well as new cancer drugs that take specific aim at
tumor cells and gene-based diagnostic tests for the AIDS virus. The
Biotechnology Industry Organization counts more than 155 such advances
approved by the Food and Drug Administration, 70% of them in just the
past six years.

Every success, however, is accompanied by far more failures. Since it is
almost impossible to tell which of the thousands of promising ideas will
turn into a hit, the losers of the biotech lottery effectively fund the
windfalls of the handful of lucky winners.

In other industries, much smaller losses have raised investors' hackles.
Shortly after his investment in USAir went south in the early 1990s,
Warren Buffett famously castigated the airline industry for squandering
investors' money and joked that capitalism would be better off if someone
had shot down Wilbur Wright's first flight. "The net return to owners
from being in the entire airline industry, if you owned it all, and if
you put up all this money, is less than zero," Mr. Buffett, the chairman
of Berkshire Hathaway Inc., said at the time.

Overall, airlines accumulated a net loss of USD 5 billion from 1947 to
2003. Publicly traded biotechnology companies in the U.S. lost USD 41
billion from 1990 to 2003, according to Ernst & Young LLC.

Biotechnology research spending now consumes roughly USD 18 billion a
year, more than the federal National Institutes of Health spends on heart
disease, cancer and infectious disease, and close to two-thirds of the
pharmaceutical industry's research spending. Taxpayers fund the NIH,
while buyers of profitable prescription drugs pay for the billions that
companies such as Merck & Co. and Pfizer Inc. plow into research.

The primary driver of biotechnology research, by contrast, is the
apparently boundless optimism of investors. Biotech's mostly small,
research-driven start-ups can spend years on basic-science studies before
they even start testing a drug, yet investors nurture hopes of huge
rewards far in the future.

The biotechnology industry also draws financial support from venture
capitalists and drug-industry partners seeking access to promising
experimental drugs. But in most years it raises far more from share
offerings. Even venture-capital investments are tied to stock-market
sentiment, since venture capitalists ultimately hope to take profits by
publicly offering the shares of the start-ups they fund.

In 2003, U.S. biotechnology firms raised almost USD 4 billion by selling
new stock issues to institutional and individual investors, according to
Burrill & Co., a San Francisco investment bank that specializes in life
sciences. The same year, U.S. biotechs as a group managed to post almost
that much in aggregate net losses. Only 12 of the 50 largest biotechs,
measured by market capitalization, turned a profit in 2003.

The industry's losses have generally grown larger over time, despite
occasional years such as 2003 when they narrow. One reason: The success
of companies like Amgen and Genentech draws attention to biotech, leading
to the founding and public listing of more and more money-losing concerns.

Fourteen years ago, net losses at the 194 U.S. biotechs then listed
publicly amounted to USD 900 million, according to Ernst's figures. In
2003, 314 public companies in the U.S. racked up total losses of USD 3.2
billion. That was better than the USD 9.4 billion total loss in 2002,
when Ernst says merger- and restructuring-related accounting charges made
losses unusually large.

 S.G. Cowen Vice Chairman Stelios Papadopoulos, a biophysicist turned
investment banker, has maintained an index of biotech stocks weighted by
market capitalization since 1981, shortly after the first biotech
companies went public. Had it been possible to buy shares in his index
back in January of that year, every dollar invested would have been worth
USD 7.92 by the end of 2003.

By contrast, a dollar's worth of the Dow Jones Industrial Average in
1981, with dividends reinvested, would have grown to USD 20.78 over the
same period. Sunk into 20-year Treasury bonds with the proceeds
reinvested, that dollar would have been worth USD 11.94, according to
Ibbotson Associates, a Chicago investment-research firm. No biotech has
ever paid a regular cash dividend, Dr. Papadopoulos says, although some
have occasionally made one-time cash distributions. Such payments
shouldn't affect the comparison, he says.

Almost one-sixth of the more than 350 U.S. biotechs that have gone public
over the past two decades either were bought out for pennies on the
dollar, dissolved themselves or had filed for bankruptcy protection by
the end of 2003. Names that once raised hopes of medical miracles are now
forgotten: Escagenetics, Advanced Tissue Sciences, ImmuLogic, Gliatech.

These are the headstones in a graveyard of investors' dreams. Early in
the industry's history, biotech pioneers argued that genetic engineering
could cut short the years-long testing process that traditional
pharmaceuticals must go through. Since biotech drugs are often versions
of the body's own proteins, the thinking was that they'd sail through
safety tests. That didn't turn out to be the case, and these days
genetically engineered medications generally take 10 to 15 years to win
approval, much the same as other drugs.

A decade later, drugs made from bioengineered antibodies were touted as
potential magic bullets against cancer and other diseases. Such
antibodies have only come into general medical use within the past five
years or so.

By the turn of the millennium, the deciphering of the complete human
genetic code or genome appeared to herald a new age of treatments
personalized for individual genetic differences. This sparked an
astonishing 170% rise in biotech stock prices in just four months --
followed by a steep crash over the next year. Four years later, such
treatments are still mostly hypothetical.

Biotechnology companies are essentially research and fund-raising
machines devoted to selling their scientific and medical "story" to
investors and spending the resulting cash on laboratory studies and
clinical testing. Some companies survive as long as two decades on
investors' largesse without developing a revenue-producing drug. Like the
dot-coms that populated the landscape during the late 1990s, the vast
majority of biotechs have neither profits nor meaningful revenue and no
guarantee they'll ever have either.

To biotech enthusiasts, that merely underscores the need for investors to
have patience. "Amgen and Genentech are just the first ones to finish the
race. They hold the promise of what so many of these companies could
become," says Laurence Bleicher, an analyst for portfolio managers at
Marsico Capital Management LLC.

Ernst analyst Scott Morrison believes that biotech as a whole might be
profitable as early as 2008, although that prediction omits many
generally accepted accounting charges, assumes further consolidation in
the industry and doesn't take into account any future moves to control
health-care costs by limiting payments for high-priced biotech drugs.

Biotech stocks are tremendously volatile because they are so often driven
by speculation about the unknowable. Investors chase scientific fads but
drop a company instantly at word of bad news. When La Jolla
Pharmaceutical Co.'s lupus drug failed to demonstrate efficacy in a trial
last year, its shares fell 72% in a day.

The reverse is also true: Genentech shares soared 45% one day in May 2003
when a tumor drug called Avastin showed surprising efficacy against colon
cancer. The company's shares have more than tripled since that
announcement, adding almost USD 40 billion to Genentech's market
capitalization despite warnings by skeptics that future Avastin sales
can't possibly justify the increase. Genentech insiders have been
steadily exercising and cashing out stock options since last May.

Bankers such as Dr. Papadopoulos suggest that such rapid stock-price
moves are themselves a primary reason to consider biotech investing.
Since few investors buy biotech index funds or invest across the entire
industry, he argues, industrywide returns are beside the point. Instead,
investors look for good opportunities to pick winners in the short term.
"If not for the volatility of the sector, there wouldn't be a sector," he
says.

Ned Davis Research Inc., a Venice, Fla., firm that advises institutional
investors, calculates that over the past decade, shares of smaller
biotechs experienced more rapid ups and downs than all but four other
sectors -- Internet software, computer chips, and chip-making and
networking equipment. Shares of larger biotechs were less volatile but
still bounced more than those of gold-mining and airline companies.

Some individual investors say they're perfectly satisfied with that.
"Biotech for me, really, is speculation -- it's high risk, high reward,"
says Tom Jacobs, a biotechnology investor and until recently a senior
analyst for the Motley Fool online stock-information board. "I love this
stuff."

Biotechnology executives have become adept at turning the market's mood
swings to their advantage. Despite their individual volatility, biotech
stocks tend to move up and down as a group -- a trend illustrated most
vividly during the 1999-2000 bubble, when the entire sector shot up on
excitement related to the sequencing of the human genome even though most
companies did little business in that area.

When biotech stock prices pick up, as they have since mid-2003, companies
rush to the markets with fresh stock offerings. Industry executives like
to repeat a maxim often attributed to George Rathmann, Amgen's first
chief executive: Take the hors d'oeuvres while they're passing the tray,
not just when you're hungry. (Mr. Rathmann says he didn't coin the maxim,
although he often uses it.)

Such stampedes often glut the market with new shares, triggering a
general decline in biotech stocks and the start of the next cycle. Since
last November, 22 biotechs have issued shares to the public and another
21 are waiting in the wings, according to Recombinant Capital, a Walnut
Creek, Calif., research firm. Some analysts suggest the long line is a
signal that biotech shares have peaked.

But many biotech investors are determined to hang on for the ride. Says
Mr. Eadington, the Newport Beach, Calif., investor: "I like the odds here
better than in Vegas."




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