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Not since the mid-1980s have financial investors been so interested
in the business of genetic engineering. During the first four months of
this year, biotechnology companies in the US raised $1 billion dollars
through public offerings of stock. By October, the figure had risen to more
than $1.5 billion.

The last time investors were this willing to provide biotechnology firms
with so much working capital was in 1986, when $860 million was raised
on the stock market. Since then, the industry’s stock has not proved very
attractive; last year, for instance, public offerings of stock in biotechnology
companies pulled in just $334 million.

So, why is it that biotechnology firms are suddenly able to raise such
vast sums and why are investors today more willing to risk their capital
on the biotechnology industry? Has the industry come of age? Is there less
risk? Or are we witnessing just another round of speculative buying by portfolio
managers who aim to take profits before biotechnology stocks again fall
out of favour with investors?

One stimulus for the buying binge in US biotechnology stocks is the
prospect of a share in the spectacular profits that a handful of enterprises
are beginning to announce. The profits, however, are largely concentrated
in one major sector, health care: the agricultural and industrial sectors
of the industry have not had the same allure for investors. This is because
of the long time needed to develop products, public concern about the release
of engineered organisms into the environment and uncertainties about the
sort of regulations that federal and state authorities will introduce.

Although the agricultural sector is expected to be growing rapidly by
the mid-1990s, it is not clear whether the growth will match the level of
interest that investors are expected to be showing the drugs and medical
diagnostics sectors in the 1990s. The main reason is that traditional technologies
will remain competitive in the agricultural sector, restricting the profits
that can be made from genetically engineered products. In the medical sector,
biotechnology will offer unmatched, breakthrough treatments.

But this mixed, near-term picture does not discourage some industry
experts and company executives. ‘The industry is starting to develop a track
record of product success, regulatory success, and even some financial success,’
says Linda Miller, vice president for biomedical technologies at PaineWebber,
a financial investment and stockbroking firm in New York. Sales revenues
of long-established companies such as Amgen and Genentech, both based in
California, are so high this year that Miller calculates that the balance
sheet for the 15-year-old industry as a whole is shifting into the black
for the first time ever.

There are about 750 biotechnology companies in the US developing therapeutic
drugs and diagnostic tools for humans and animals; new crop varieties, virus-resistant
plants, safer insecticides and other agricultural products; and microorganisms
for industrial use in fermentation and for cleaning up chemical wastes.
The industry is convinced that genetic engineering will enable them to displace
many existing products with more effective, less costly substitutes. But
success will depend as much on access to capital as on good science.

Richard Godown, president of the Industrial Biotechnology Association,
a business and lobbying group based in Washington, says the industry is
growing in size and profitability. Thus, investors are becoming more confident
in biotechnology, he says. Industry sales, Godown predicts, will jump from
$1 billion in 1990 to $4 billion this year and approach $50 billion by
the year 2000. Biotechnology’s growth potential is similar to that of the
desktop computer industry in the 1980s, say business analysts.

Godown’s optimism rests on the fact that there are more than 100 genetically
engineered medicines and vaccines being developed in the US, 18 of which
are in the final phase of approval by the Food and Drug Administration.
So far, the ad-ministration has approved about 20 human and animal drugs,
hundreds of diagnostic tools and other genetically engineered products for
use in medicine, agriculture and industry.

These kinds of numbers are starting to register with private investors
as well as portfolio managers. Many of them are kicking themselves for their
lack of foresight in not investing in Genentech before the company began
selling its first major revenue producer, genetically engineered human growth
hormone, in 1985. The product triggers growth in children lacking sufficient
natural growth hormone and, by 1988, sales were well over $100 million.

In 1987, Genentech won the approval of the Food and Drug Administration
for a bigger blockbuster – tissue plasmogen activator (TPA), a medicine
for dissolving blood clots. TPA produced revenues of $200 million in 1989
and again in 1990. Not only did these two drugs turn Genentech into a cash
cow, they prompted Hoffman-La Roche, a Swiss pharmaceuticals company, to
buy 60 per cent of the firm’s stock in 1990 for $1.6 billion. Although
the price may have seemed high relative to the company’s profits, some analysts
consider the purchase a sound investment for the long term.

Genentech’s success had long been forecast, but the launch of its first
products by themselves was not enough to allay the concerns of investors,
many of whom had expected more rapid advances from the biotechnology industry.
Analysts widely credit the soaring revenues and profits of Amgen with encouraging
investors to give the industry another chance. Amgen with its erythropoietin
(EPO), a hormone that promotes the formation of red blood cells and is effective
in treating anaemia in patients using kidney dialysis machines, became the
industry flagship. First marketed in June of 1989, EPO generated sales of
$148.5 million within the 10 months to the close of the company’s fiscal
year at the end of March 1990. Revenues for the year ending March 1991 were
$304.5 million and sales for the quarter to the end of September were $112.2
million.

Other companies are becoming profitable, too, as a variety of genetically
engineered products gains ground. Biogen, based in Cambridge, Massachusetts,
developed Alpha Interferon in February 1991 for treating hepatitis C; Chiron,
based in Emeryville, California, began selling its hepatitis C diagnostic
kit in May 1990 and Immunex, based in Seattle, Washington, has increased
its revenues with a drug for stimulating the production of cancer-fighting
white blood cells.

With more products on sale and the economic recession encouraging investors
to play safe by turning to the health care sector, the stage was set for
biotechnology companies to raise record amounts of capital this year. Another
factor was the low price of the industry’s shares, says James McCamant,
editor of the Medical Technologies Stock Letter, published in San Francisco.
‘Biotech stocks as a group got very undervalued, first in 1983 and when
the crash came in 1987 they just got clobbered again,’ he says. Even after
Genentech started selling TPA in 1987, which signalled the march of the
industry’s largest companies towards profitability, McCamant says that many
biotechnology firms were undervalued and their stock was going cheap.

By mid-1990, the stock prices of 30 or so prominent biotechnology holdings
had climbed considerably. However, their values fell dramatically with the
rest of the stock market as investors retreated in reaction to Iraq’s invasion
of Kuwait and the ensuing crisis in the Gulf. Early in 1991, with the war
going well for the US and its allies, confidence returned and interest in
the biotechnology industry soared.

By all accounts, the volume of funds raised is breathtaking and, at
the same time, reassuring in that it virtually guarantees that some companies
will be able to complete expensive clinical trials and field experiments
for their latest drugs. ‘It bodes well for a sustainable environment for
some existing companies,’ says PaineWebber’s Miller. Moreover, the market’s
response reflects a deeper confidence on the part of institutional investors
in biotechnology. ‘We do not think this is just a one shot advance for the
industry,’ she adds.

More companies to sprout, or not

George Rathman, president of ICOS, a five-year-old biotechnology company
based in Bothell, Washington state, and a former chief executive of Amgen,
goes further. He predicts that the number of biotechnology companies in
the US will increase markedly during the decade even after mergers and takeovers
are taken into account. ‘There’s plenty of room for an awful lot of companies,’
he says.

This view is not universally accepted, however. ‘We are in a period
where even Dumbo will fly,’ says Richard Bock, a biotechnology analyst with
Sutro, an investment company based in Los Angeles. He puts this year’s spectacular
success of the industry’s appeal for funds down to an overreaction by investors
to the sharp rise in earnings of a few companies, such as Amgen. After the
initial rush, he notes, many companies trying to raise cash found they had
to reduce the size of their offering, cut the asking price, or abandon it
entirely.

In the wake of this stock buying binge, what Bock calls ‘biobulimia’,
he says investors should expect a fall in the stock prices of biotechnology
companies. This is especially true of those firms that have gone public
for the first time. Even the prices of established companies have fluctuated
significantly from peaks reached in the first half of 1991. Shares in Chiron
selling at $68.75 in mid April were going for $50.75 by early August and
are now priced at $72.75. Similarly, shares in Genetics Institute, a company
based in Cambridge, Massachusetts hopped from $38.75 in April, to $32.25
in August, to $37.50 now, while those in Xoma, a company based in Berkeley,
California, slid from $26.50 to $18.50 to $16.50.

‘I don’t believe the number of companies will increase sharply,’ says
Mark Dibner, director of the North Carolina Biotechnology Center, a non-profit
making organisation that promotes growth of the industry in the state. ‘There
will, however, be formations of new firms that will offset some of those
that disappear.’ One survey published last year revealed that 39 per cent
of biotechnology firms in the US are expected to be absorbed by a larger
company within five years. The survey also revealed that 47 per cent of
US biotechnology firms hope to acquire a smaller firm in the industry during
the same period.

With such events in mind, few analysts are prepared to predict what
the biotechnology industry will look like by the year 2000. The only thing
they seem to agree about is that during the 1990s the genetic engineering
industry will be at least as dynamic – and as volatile – as in the past
decade. As Rathman says, investors must not only be selective when buying,
they must also have patience. ‘Most biotech ventures end up doing something
different than their initial plans,’ he notes. ‘What you are betting on
is the resourcefulness of the people and their scientific talent.’

Mark Crawford is a reporter at New Technology Week, based in Washington.