Subject: Biotech Shares May Soon Fulfill Profit Promise Date: Published: 10/8/90 (144 lines) Source: Wall Street Journal. Copyright Dow Jones & Co. Inc. OTC Focus: Biotech Shares May Soon Fulfill Profit Promise ---- By Anne Newman Staff Reporter of The Wall Street Journal NEW YORK -- The biotechnology balloon is sagging, but it isn't about to collapse now that genetic engineering finally seems close to turning the stocks' promise into profits. That at least is the belief of two astute mutual fund managers, both of whom have outperformed this year's sagging stock market with their biotechnology holdings. Biotech companies have long been known for having breathtaking stock prices and a lack of earnings. Now, however, some big investors are in the stocks, and a half-dozen biotech companies are expected to be marketing products and earning slight profits in 1991. "The bubble could burst if something happens to Amgen," cautions Michael Gordon, manager of the $190 million Fidelity Select Biotechnology Fund. But right now he isn't selling Amgen, which he has held three years. Amgen's striking success with its anti-anemia drug Epogen has helped the 65-stock Fidelity biotechnology fund soar 24% in this year's first nine months. The gain contrasts with declines of 13% in Standard & Poor's 500-stock index and 25% in the Russell 2000 index of smaller shares. Fidelity's Mr. Gordon expects the biotech group to slow but still outperform the weakening stock market. What he doesn't expect is a repeat of the rout of 1988, when biotech shares plunged 39% and were the stock market's worst-performing sector after sales of a Genentech drug failed to live up to expectations. The process of creating new, genetically engineered ways to treat fatal and disabling diseases "is a completely and entirely new technology," he says. "Products coming to the market like EPO can't be developed any other way." Investors' best bets are companies such as Amgen that have products already in the market or awaiting regulatory approval, says John Kaweske, manager of the $94 million Financial Health Sciences Portfolio of Denver. Companies already showing slight profits, or expected to post them in 1991, are Amgen, Biogen, Centocor, Chiron, Genzyme and Immunex, according to First Call, a Thomson Financial Networks subsidiary. But even the glimmer of earnings can't protect investors from the regulatory skepticism, patent feuds and competitive brawls that frequently topple shares of maturing biotech companies. Mr. Kaweske advises short-term investors to prospect elsewhere. His fund, which rose 3.4% in this year's first nine months, ranks second in five-year performance among all mutual funds tracked by Lipper Analytical Services Inc. He has owned the shares he discusses for at least two years. Similarly, PaineWebber biotechnology analyst Linda Miller, who expects biotech shares to outperform the stock market by 10 percentage points in the next 12 months, recommends them only for "speculative" investors. Mr. Kaweske likes companies that don't depend on a single product. In December he expects a Food and Drug Administration advisory panel to favorably review Amgen's Nupogen, developed to boost bone marrow and fight infection associated with chemotherapy, acquired immune deficiency syndrome and leukemia. Analysts expect Amgen to earn $1.21 a share in fiscal 1991 ending in March, and $1.82 a share in fiscal 1992. At Friday's closing price of 44 3/4, Amgen is trading at about 25 times its expected 1992 earnings. Mr. Gordon considers that a reasonable multiple for a company with an expected growth rate of 50% a year. Amgen and other biotech stocks could get hammered temporarily if there is a surprise delay by the FDA panel, both fund managers concede. A patent dispute -- not uncommon among drug companies -- also haunts Amgen. An appeals court is expected to rule later this year in the long-running patent battle betweem Amgen and Genetics Institute. In the long run, both fund managers believe that the medical frontiers opened by genetically engineered drugs will outweigh such risks. On Oct. 22, for instance, an FDA panel will review the only treatment available for Gaucher's disease, a rare genetic disorder that causes deterioration of the liver and other organs. Mr. Kaweske expects a favorable review for the product, Ceradase, developed by Genzyme, because he has faith in the quality of Genzyme's clinical data. High-quality clinical data is crucial to biotech companies. Two companies -- Cetus and Immunex -- suffered setbacks in late July after a new FDA panel set unexpectedly tough testing standards for young biotech companies. Cetus lost more than half its market value after the panel ruled that it hadn't provided sufficient data to win favorable review of interleukin-2, its flagship drug for advanced kidney cancer. Despite Immunex's setback, Mr. Gordon now favors that stock because the Seattle company recently has reacquired some marketing rights previously sold to drug companies with large sales forces. Such partnerships can be "double-edged swords," he says. However much they may boost investors' confidence in the early research stages, investors later on aren't happy to find large chunks of revenue being siphoned off by big-company partners. Mr. Gordon also owns Genetics Institute. The company has developed a product known as Factor VIII, used to treat hemophiliacs. Since it is genetically engineered, it is helpful in avoiding transmission of AIDS through blood transfusions. But he has restrained his investments in the stock because Genetics Institute has licensing agreements with major drug companies for all of its first-generation products. Analysts expect the company to turn a profit in 1992. Many potential markets are big enough for more than one player, the money managers say. Yet the companies compete fiercely to reach the public first. Centocor and Xoma have been in a race to win FDA approval of their monoclonal antibodies for use in treating septic shock. "I think the market probably is big enough for both," says Mr. Kaweske. But right now he says he owns only Centocor, as Xoma's timetable for FDA approval has slipped. Centocor also recently sold 200 doses of its Centoxin, at $2,500 a dose, to the U. S. Army for use in the Middle East. The two fund managers also invest in companies that aren't pure research houses. Both like Chiron, which markets a hepatitis test. Mr. Gordon's fund also owns Applied Biosystems, which makes machines for analyzing DNA, and Life Technologies, which supplies reagents to biotech companies. Mr. Kaweske owns Cytogen, which develops tests for cancer. More products will be coming to market in the next few years to treat such life-threatening diseases as cancer, hepatitis, leukemia and AIDS. And with scientists just beginning to crack genetic codes, the market is only "embryonic" for products to treat genetic-linked diseases such as Alzheimer's, cystic fibrosis and sickle cell anemia, says Mr. Kaweske. "We're just at the origins," he says. [This article is made available here by Dow Jones Co. for the personal and non-commercial use of callers to this bbs, in the hope that it will be of some help to those who are suffering from the disease and others who are seeking to help them.]