Manic investing
Biogen Idec Inc. stock fell so hard yesterday it could have left a crater.
The 43 percent plunge in Biogen shares only looked attractive to investors who owned the stock of Elan Corp., which lost 70 percent of its value during the day. Cambridge-based Biogen and Elan, partners in the development of the new multiple sclerosis drug Tysabri, paid the price after they suspended sales of the treatment due to the death of at least one patient.
An investment in a biotechnology company with a promising new drug has always injected greater risks and opportunities into a stock portfolio. But the opportunities have grown even greater and the risks have become riskier for investors owning many of the highest profile biotech companies.
There is greater opportunity because the drug industry has become so hungry for new products to sell. The search for winners drives stock prices higher. Analysts following companies with new products forecast big sales for years into the future, which helps support current stock prices.
There is greater risk because the fall from artificial heights can be precipitous and the regulatory environment for new drugs after the Vioxx debacle has turned much more cautious. Drug and biotech stocks have suffered violently negative reactions to news like yesterday's Tysabri disclosure, the kind of damage done in a stampede to sell.
The cost to Biogen and Elan shareholders yesterday: $17.8 billion.
''The whole proposition becomes riskier for any given company and any given drug," says Warren Isabelle of Ironwood Capital Management in Boston.
For a sense of the hyperbole on the way up and the path down for Biogen shareholders, consider comments yesterday from analyst Jennifer Chao of Deutsche Bank. ''One minute this was the holy grail," she told Bloomberg News. ''The next minute it appears to be one of the biggest disappointments in biotech in the past decade."
Biogen stock already was climbing higher when the company said it would accelerate plans to seek Food and Drug Administration approval for Tysabri in February last year. From there, Biogen shares increased about 50 percent more. Hopes for the new drug probably added $10 billion to the value of Biogen stock.
That's a lot of hope under any circumstances. It's extraordinary considering that Biogen had only a 50 percent interest in Tysabri, sharing the drug with Elan. What's more, Tysabri would likely cut into revenue from its existing MS treatment, Avonex.
Biogen was hardly the only stock climbing higher on the prospects of a new drug. At about the same time, Sepracor Inc. of Marlborough saw its shares climb by about 150 percent on hopes for its new Lunesta insomnia drug. Lunesta is expected to hit the market this month, but it already has added about $4 billion in value to Sepracor stock.
There were reasons to be hopeful for both drugs, but climbing stock prices demanded blockbuster commercial success.
Trouble hit Biogen and Elan like a hurricane. The companies said one patient died of a rare disorder after two years of treatment with a combination of Tysabri and Avonex. A second patient may have contracted the same disorder.
The companies said they took Tysabri off the market and out of clinical trials in consultation with the FDA. A fair question: What would have happened if the same developments occurred before the Vioxx controversy?
There's nothing wrong with a more cautious approach to new drugs, especially treatments that rode a fast track to FDA approval. Stocks will recover if products are proven to be safe and useful.
The real damage is caused by an investment cycle that starts with too much money chasing hope and ends with too many people racing for the door.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
