Subject: Soaring Somatogen Leaves No Room for Investing Error
Date: Published: 12/19/91 (115 lines)
Source: Wall Street Journal. Copyright Dow Jones & Co. Inc.

    Heard on the Street:
    Soaring Somatogen Leaves No Room for Error
    For Investing Under the Spell of Biotech Fever
    ----
    By Anne Newman
    Staff Reporter of The Wall Street Journal

    NEW YORK -- Biotech fever is still widespread among
 investors even after the group's recent cooling, and nowhere
 is their enthusiasm more evident than in the case of
 Somatogen.
    The stock has more than doubled to 39 3/4 in the four
 months since the young biotechnology concern went public at
 19.  The company's market value exceeds $280 million, not bad,
 considering that Somatogen doesn't expect to have a product
 on the market at least until 1995.
    If then.  The Boulder, Colo., company is engaged in the
 noble but daunting task of developing a cheap and pure
 substitute for oxygen-carrying components of human blood.
 Several other companies also are vying to be first in what
 some think could be a $2 billion-a-year market for blood
 substitutes untainted by the threat of diseases such as AIDS.  
 No matter how good the company's science is, some analysts
 say, Somatogen stock at these levels holds the potential to
 disappoint investors because the road to market for a
 scientific breakthrough is rarely short and straight.
    What Somatogen has achieved to date is this:  It has
 transplanted the human hemoglobin gene into bacteria, and is
 producing a genetically engineered human hemoglobin known as
 rHb1.1, which it hopes can be used for blood transfusions.
    Now Somatogen faces two high hurdles.  It must crack an
 obstinate scientific mystery by showing that a
 hemoglobin-based product can be safely used in humans, which
 has never been done before.  The company has just begun
 low-dose trials on humans to see if it has solved that
 problem.  Then, it must construct one of the largest
 production plants ever built in the young biotech industry,
 complete with big fermenting and purification processors that
 will resemble silos.
    Bulls say the company's top-notch researchers will solve
 the safety issue in their first round of human studies.  Last
 month, when federal regulators cleared Somatogen to begin
 human trials of rHb1.1, the stock hit a high of 42 1/2.
    The trouble is, hemoglobin-based products have never
 before been introduced into humans without making blood
 vessels constrict, causing shortness of breath, high blood
 pressure and other problems.  Hopes have been dashed before
 when several promising products worked in animals, but failed
 in humans.
    "We all thought that hemoglobin would float in the
 bloodstream without major side effects," says Col. John Hess,
 chief of blood research at the U. S. Army's Letterman
 Institute of Research in San Francisco.  The Army has been
 conducting and following research on hemoglobin for 24 years,
 but Dr. Hess says its effect in the bloodstream may be toxic.
 "I'm not sure anybody knows whether a human-based hemoglobin
 can be made safe," says Dr. Hess, who declines to comment on
 individual companies' research.
    "There are some very fundamental problems" with hemoglobin
 still to be solved, agrees Joseph Fratantoni, chief of the
 U. S. Food and Drug Administration's laboratory of cellular
 hematology.  "We don't know what we're up against yet," he
 says, adding that the regulators will be closely watching
 Somatogen's initial tests on healthy volunteers.
    Chief Financial Officer James C. T. Linfield says Somatogen
 is "very encouraged" by its animal tests.  He concedes,
 however, that "it's not clear what the mechanism is" that led
 other products to cause adverse reactions in humans.
    If early tests show safety isn't a problem, Somatogen must
 spend at least $100 million on a plant to boost capacity by a
 factor of 33, using three 50,000-liter facilities to purify
 the product.  The plant is crucial as it must be licensed by
 the FDA before Somatogen can begin final product tests.
 Financing must be lined up for the plant, due to be built by
 early 1994.  Meanwhile, development costs are growing.  Analyst
 Robert M. Peterson of Hanifen Imhoff Inc. of Denver estimates
 losses at about $107 million over the next four years.
    Somatogen needs to slash output costs, to compete with
 cheaper, existing sources of blood.  "They seem to have the
 best technology so far," says Tony Sutton, a biotech analyst
 for Fidelity Investments in Boston, which owns some of the
 stock.  Rivals tackling the problem from different angles
 include Baxter International; Alliance Pharmaceutical; newly
 public DNX, which is in an even earlier stage of development;
 Biopure, in which Upjohn has a major investment; and a number
 of closely held companies.  Mr. Linfield says there are few
 financing alternatives for companies such as Somatogen that
 want to retain full marketing rights rather than share
 potential profits with a big corporate partner.
    Mr. Peterson estimates sales at $270 million and earnings
 at $7 a share in the fiscal year through mid-1996.  The
 company's investment banker, Alex. Brown & Sons, has a much
 higher fiscal 1996 profit estimate, $12.10 a share.  Somatogen
 won't discuss the estimates.  Much as Mr. Peterson admires
 Somatogen's "world-class science," he recommends waiting to
 buy the stock at lower levels.
    ---
    Somatogen Inc. 
    (OTC; Symbol:  SMTG)
    Business:  Biotechnology
    Year ended June 30, 1991:
    Revenue:  $1.7 million
    Net Loss:  $7.1 million; $1.21 a share
    First quarter, Sept. 30, 1991:
    Per-share loss:  31 cents vs. 25 cents
    Average daily trading volume:  100,372 shares
    Common shares outstanding:  7.1 million

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