biotech Investment: Gambling on Scientific Uncertainty

By Sandra Sugawara= 1991 The Washington Post=

Take a look at life in the biotechnology fast lane: In the past six months,

The stock market value of MedImmune Inc., a three-year-old Gaithersburg, Md.

company, went from $115 million to $654 million before plummeting.

Monday, Wall Street put the value of the company _ based on stock price

times the number of common shares outstanding _ at $434 million. It's the same

company, same scientists, same products as last spring.

Although MedImmune has a drug on the market and the company is making a

small profit, its potential blockbuster products _ vaccines for AIDS and other

infectious diseases _ are years from turning a profit. Actually, there's a fair

chance the vaccines may never make it to market at all.

Sound like a risky business to invest in? Perhaps. But since the beginning

of this year, Wall Street investors, afraid that they might miss a chance to

make huge profits, have been pouring money into biotech stocks with incredible

frenzy. And, afraid of losing their money on these young, unproven companies,

in the last couple of weeks some have been retreating from many of those same

stocks at the first hint of bad news.

``Things were getting a little hysterical out there,'' said Jim McCamant,

editor of Medical Technology Stock Letter.

The swings can be caused by strategic corporate pronouncements or seemingly

unrelated news, such as Earvin ``Magic'' Johnson's announcement earlier this

month that he was infected with the HIV virus, a disclosure that pushed up the

stock prices of several companies involved in AIDS research.

AIDS stocks have been ``hot'' much of this year. So have the stocks of

companies working on other high-profile ailments, such as Alzheimer's disease.

Finding a cure for one of these diseases could make a biotech drug company and

its investors rich, particularly since many important new drugs historically

have had hefty profit margins, making some pharmaceutical companies highly

profitable.

This prospect has made some investors salivate. An index of biotech stocks

compiled by analyst Denise Gilbert of Smith Barney, Harris Upham & Co. rose 170

percent from Jan. 1 to its peak two weeks ago. ``People were buying anything

that literally smelled like biotech,'' said Gilbert. Since then, the index has

fallen but is still up 116 percent from the beginning of the year.

It's a stunning rise, particularly because biotech companies are an enormous

gamble. Few have products to sell. Many don't even have products to test. In

prospectus after prospectus, biotech companies point out they have no marketing

experience, no assurance that federal regulators will approve their products,

no way of knowing if they will face patent battles or if they will win if they

did encounter such legal hurdles. Furthermore, the science could be beyond the

understanding of some investors.

Hence the volatility. When a source perceived to be an authority on science

_ the Food and Drug Administration or Merck & Co. _ gives a nod or a cold

shoulder, investor reaction can be seismic.

For example, last week U.S. Bioscience Inc., a small, unprofitable company

located in Blue Bell, Pa., announced that the FDA had promised to give prompt

review to its new drug designed to prevent side effects from chemotherapy. The

company's market value skyrocketed past $1 billion. Not bad for a company that

was valued at about $323 million just 11 months ago.

Likewise, when Merck announced it was investing millions in MedImmune's AIDS

vaccine, Wall Street decided to follow Merck's lead, sending the local biotech

company's stock sky-high _ from $9.25 last May to $52.75 by the beginning of

November. Since then, the share price has fallen to $35, something analysts

attribute to the woes of other biotech companies.

In fact, it's not unusual for biotech companies to get battered for the

mistakes of competitors. Because Wall Street can find it difficult to

differentiate among the sciences under development, disappointed investors

often respond by bailing out from companies involved in the same line of

research.

Many analysts and traders brush off the recent drop in stock prices as a

necessary adjustment in an overheated market, caused in part by inexperienced

investors who spotted the momentum of biotech stocks this summer and jumped on

for the ride. Because many of the stocks are usually so lightly traded, a surge

in demand can dramatically move a price up or down.