Biotech's bumpy ride
The heart of the biotechnology investment story was simple and appealing just six months ago. Giant pharmaceutical companies needed what the biotech industry was developing and had plenty of money to spend on it.
Drug companies clearly hungered for new drugs and therapies to replenish their thinning product pipelines. They had lots of money to spend and were amassing even more cash. Many big pharmaceutical companies jumped at a one-time opportunity to repatriate overseas profits at reduced US tax rates and made it clear they are bringing the cash here to spend it.
Plenty has changed since then. Most importantly, the focus of biotech investors has shifted from opportunity to risk.
Regulators face much greater pressure on drug-safety issues today, and no one expects that will change soon. The Food and Drug Administration has operated without a permanent commissioner since Mark McClellan, who won industry kudos for his efforts to make his agency more responsive to new drug applications, left the job. Longtime FDA insider Lester Crawford, awaiting confirmation, is in line to get the job he performs on an acting basis today.
Drug-safety issues that started with the Vioxx debacle have enveloped the FDA in a crisis environment. During nomination hearings last week, Crawford got an earful from senators who told him the FDA had to do a better job of monitoring drug risks.
For investors, two important questions come to mind. First, what does this mean for the approval of new drug applications? Also, what does it mean for approved drugs if patients develop health problems that might be related to or caused by the medicine?
The early examples of approved drugs that run into trouble are not encouraging. Set aside the case of Merck & Co. and Vioxx, a very large and extraordinary event, and look instead at Tysabri, the multiple sclerosis drug owned by Biogen Idec Inc. and Elan Corp. PLC.
Biogen and Elan took Tysabri off the market last month, after two patients came down with a rare brain disease and one of them died. What happens next and when it happens are very good questions.
Combined, shares of Biogen and Elan lost nearly $18 billion of value the day the Tysabri news was disclosed. Arguably, the entire monetary value of what had been considered a new wonder drug was wiped out. That seems more like a panic than a reappraisal, but the stocks continue to trade at roughly the same prices weeks later.
The implications for new drug applications are not as obvious. ''The way the FDA is positioned now reminds me of the late '90s when you had iteration after iteration of approved compounds because they were safe and fell under the radar," says Warren Isabelle of Ironwood Capital Management in Boston, who invests in biotech stocks.
Biotech stocks, beyond Biogen and Elan, are struggling to make any headway. The Amex Biotechnology Index is down 7.9 percent so far this year, roughly in line with the broader Nasdaq stock index. But a majority of stocks in the biotech index have lost more ground than that.
Closer to home, a Bloomberg index of Massachusetts life science companies has lost 13 percent of its value this year. Many of the biotechnology companies included in the index, which are relatively small, suffered significant stock losses.
Meanwhile, Combinatorx Inc. of Boston called off its initial public offering last week after several postponements. It cited adverse market conditions as the reason.
Product risks have clearly gone up in the biotech world. But the big-picture story that seemed so appealing to investors six months ago is still true today. Biotech is still the industry creating new drugs, and demand, from big pharma and patients, is as strong as ever.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
