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The Boston Globe OnlineBoston.com The Best in Massachusetts Business

Biotech industry's still waiting to break out

Discovering and testing drugs remains grueling work

By Jeffrey Krasner, Globe Staff, 5/21/2002


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A year ago, it seemed as though biotechnology -- an industry that for years has promised more but delivered less than any other sector -- was about to break out of its youthful underachiever phase.

After a highly publicized research race, the National Institutes of Health and Celera Genomics Group of Rockville, Md., both announced in February 2001 they had unraveled the entire human genetic code. The precise list of the 3 billion chemical letters that make up human DNA was seen as the "book of life" that would give scientists unprecedented opportunity to target the specific genes responsible for diseases.

Almost before the hoopla had died down, biotech companies were proclaiming the "post-genomic" era. With the genome decoded, biologists and drug hunters could move on to other, more revealing lists. Some touted the proteome, a proposed encyclopedia of all of the proteins expressed by those newly decoded genes. It's the proteins, they said, that actually control disease processes at the cellular level. Other buzzwords surfaced regularly. "Metabolomics" was pitched as a comprehensive look at the products of a cell's metabolism.

They're not pushing any new buzzwords this year.

It turns out that even with the genome in hand, discovering drugs and testing them to prove they work is an expensive, grueling process.

"There was a lot of promise 18 months ago," said R. Dana Ono, a director of Venture Investment Management Co. LLC of Boston, which recently started a biotech venture fund, "but at the end of the day, it's the drugs that matter. The stock market went up on the promise of drugs, but people forget that the drugs still take $800 million and 10 to 15 years to develop. There was a false expectation that this would really revolutionize and cut down the length of the drug development pipeline."

The excitement of 2001 makes the bleak outlook this year all the more sobering. The American Stock Exchange Biotechnology Index is down about 30 percent from an interim peak of 618 in late November, and down almost 50 percent from an all-time high of 785 in September 2000. Friday, it closed at 420.

Still, some local biotech firms generated plenty of excitement last year. Biogen Inc. of Cambridge touted the fact that it reached $1 billion in annual revenues, primarily on sales of its Avonex multiple sclerosis treatment. Millennium Pharmaceuticals Inc., also of Cambridge, reached a deal to buy Cor Therapeutics Inc. of San Francisco in December in a stock deal worth more than $1.5 billion, making it the biggest biotech merger to date. Genzyme Corp. neared the $1 billion mark, reaching $982 million in sales, and made plans to move to a new, architecturally significant headquarters to be built in East Cambridge near Kendall Square.

But investors were largely unimpressed. It wasn't just the realization that drug discovery is still a decade-long process. The Enron scandal and revelations that Elan Corp. PLC of Ireland had invested in many young biotechnology firms with unusual swap-like deals raised questions about accounting in the industry.

Than came the ImClone Systems bombshell: In late December, the New York company said the US Food and Drug Administration had refused to even consider its application of Erbitux, a cancer drug many thought would be the next blockbuster. It was the first of a series of late-stage drugs that were knocked out of the box or delayed by what appeared to be an increasingly risk-averse FDA. And even drugs with strong clinical data are taking longer to move through the agency, which has operated for more than a year without a commissioner.

Linda Miller, manager of John Hancock's Biotechnology fund, sees the flow of bad news as a wake-up call to investors.

"A year ago, many of the risks inherent to the biotechnology business were glossed over and ignored by the market," she said. "One shouldn't diminish or trivialize last year's accomplishment. It was incredibly important. But it didn't fundamentally change the nature of risk and return in this industry. It's high risk and it takes a long time for a return."

She cited an example of the new, more sober approach: a Wall Street research report that predicted a drug would take at least two years to be approved by the FDA. Previously, some companies had predicted approval within eight months.

The latest downer for the industry came just a few weeks ago. DOV Pharmaceutical Inc. of Hackensack, N.J., was one of the few companies to go public this year, selling 5 million shares at $13 on April 25. But the stock tanked on its first day of trading, closing below $9, and investors have accused the company of misleading them and failing to disclose information about a deal with Elan. Now, there are a handful of lawsuits seeking class-action status.

The DOV controversy seems likely to delay further biotech IPOs, making it harder for companies to raise private capital.

"The lack of an IPO market makes mezzanine investors pretty price sensitive," said Bryan E. Roberts, general partner at Venrock Associates, the Rockefeller family venture capital firm.

Still, anyone who has stuck with biotech for more than one investment cycle knows there's always light at the end of the tunnel. All it takes is a new blockbuster drug or a novel scientific industry to get investors buzzing again.

"I look at the current market as a temporary malaise," said Ono. "This is just a blip. People are building infrastructure to make the genomics revolution a reality."

Jeffrey Krasner can be reached at krasner@globe.com.

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