RIDING a powerful wave of investor expectancy, the nation's biotechnology companies continue to bob like tiny corks amid ethical, legal, and regulatory issues. Earlier this month, the US Food and Drug Administration (FDA) threw cold water on a request by the fledgling industry's leading company - Genentech - to license its newest, most important, and potentially most lucrative drug. It was a stunning moment, a complete shock for the industry and for investors.
The rejection (called temporary by company officials and analysts) of the heart drug TPA left Wall Street biotech enthusiasts shivering as Genentech's stock dove more than 11 points to $34 a share. The FDA, which was immediately castigated by critics for blocking what many doctors consider a very effective drug, says it wants statistical data to determine if the drug actually helps people live longer.
Meanwhile, institutional investors scurried to sell blocks of other biotech stocks even as stock analysts peered into their computer screens, trying to figure whether the FDA slap had hurt the entire industry for the long term, injured Genentech only, or created a terrific buying opportunity.
Not to worry.
Genentech's stock had already floated back up to about $43 a share last week. The price is an amazing 438 times its earnings. Still, there is no doubt Genentech, while remaining the leading biotech stock and company, has lost some luster.
``I think there was a belief that the biotech world was going to find an effective way to deal with the regulators,'' says G.Steven Burrill, director of the high technology group at Arthur Young & Co., the management consulting firm.
``What the FDA action does is throw up the reality that the regulatory process is not as well defined a system as was assumed.'' Companies will find financings a little more difficult as a result, he says.
Instead of using Genentech as a barometer of the biotech industry, investers now are looking more closely now at the individual companies, says Stuart Weisbroad, biotechnology analyst for Prudential-Bache Securities.
``There has been a redistribution of the biotech buck that flew from institutions owning Genentech into companies like Amgen, Cetus, Chiron, and Cenacore,'' he says.
There is also much closer scrutiny of products and management by wary venture capitalists and potential corporate partners. But the bulk of the money is coming from the public markets, so Genentech and its sister firms that sell for hundreds of times their earning power cannot really complain.
Where else in today's stock market are investors glad to sink more than $6 billion into an industry composed of several hundred companies with sales totaling just a few hundred million dollars and profits more meager still?
A 1986 survey by Arthur Young found that only large companies (136 or more employees) earning an average of $2.3 million a year before taxes did not show operating losses in 1985.
Small and medium-size biotech companies, the bulk of the industry, lost an average of $1.3 million and $2.9 million, respectively, in 1985, the report says.
So far, no biotechnology company has been able to turn a profit solely from selling products made by gene-splicing. Many must do contract research or produce non-drug related products on the side.
Nonetheless, biotech, which has seen periods of doubt (1983-84) and lack of investor enthusiasm before, continues to command a market premium today - even after the regulatory blow to Genentech.
``Biotechnology is extremely cyclical - it goes from a prince to a frog, back to a prince faster than anything I know,'' says Robert J. Kunze managing partner of Hambrecht & Quist, a venture capital firm based in San Francisco.
``The problem is that expectations are met with a lot of disappointments. You look at the market capitalizations of these companies, people get really scared - and it doesn't take much to get them scared.''
One reason investors keep coming back to biotech is that a lot of very persuasive and highly educated people strongly believe biotechnology is the next technological tidal wave - as important as the fledgling semiconductor companies that spawned the computer industry.
Imagine the opportunity to buy IBM back in the 1950s when it was first gaining momentum. That's what many investors see in biotech. Analysts talk about an industry worth tens of billions of dollars by the year 2000.
``In the context of improving life and the environment, we're just on the beginning edge,'' says Mr. Burrill. ``The economic potential is absolutely enormous.''
The huge promise built up by the biotechnology industry is based on two technological developments: genetic engineering and monoclonal antibodies. Genetic engineering involves inserting a foreign gene into bacteria, then into more complex cells in animals and plants.
The other half of the equation, experts say, involves monoclonal antibodies that are supposed to recognize, and bind themselves to, specific molecules within the body.
Twinning the two findings, researchers reproduce in large quanitity (relatively speaking) chemicals found only in minute amounts in bodies that are thought to fight disease. These chemicals are then attached to the antibodies, which concentrate the drug's effect by being more specifically targeted. Genentech has, for example, produced a growth hormone which, researchers say, appears to be able to correct dwarfism.
In the long run, agricultural biotechnology is potentially an even bigger market than the drug industry, analysts say. It would use the same genetic engineering tricks to produce bigger, stronger, tougher plants that require less water - or even genetically altered animals like pigs and cows that have less fat or produce more milk yet require less food.
Many people are grappling with the new questions this raises, specificially, the morality of altering animals that may not turn out to be as physically capable or comfortable as their unaltered counterparts. In both the medical and agricultural areas, there are side effects associated with the technological advances.
In any case, there are at present only a handful of companies seriously involved in agricultural aspects of biotech. So far agricultural biotech is considered in the ``pre-emergence'' stage.
The big money is still following companies developing drugs aimed at combatting cancer or heart attacks. And despite its stumble, the biggest bets are still being laid on Genetech. TPA is still expected to be a huge success when and if it finally hits the market.
As the industry matures, analysts expect only a handful of the top companies to become full-fledged drug producers. Many smaller ones will go bankrupt, merge with big pharmaceutical makers, or find niche markets.
``There are going to be companies that are stand-alones in this area,'' says Alan Goldhammer, executive director of the Industrial Biotechnology Association. Pru-Bache's Mr. Weisbroad concurs.
``They'll essentially become drug companies,'' he says.
Right now, the biotech industry has just four drugs on the market whose sales were about $150 million last year. Analysts say sales of all biotech companies are probably no more than $500 million.
Nevertheless, drugs like TPA could change that picture. If approved by the FDA, the drug is expected to cost between $1,000 and $3,000 a treatment. Stock analysts believe the drug could take the company's sales almost overnight from about $100 million to more than $1 billion - if patent battles are won and competing European and Japanese biotech companies do not get to the world market with a similar drug first.
``There are a lot of issues confronting the industry as it commercializes the science,'' Mr. Burrill says. ``I think they'll be solved. I don't think it'll be easy, but they aren't going to prevent the industry from becoming real.''
The bottom line on the enthusiasm for biotech is that it has managed to distill into a test tube the elusive quality of human hope.
Investors buying biotech stocks are essentially buying futures contracts, hoping for a wonder cure or at least a drug that can compete in the market. Each new announcement of a new genetically engineered drug aimed at treating cancer, heart attack, arthritis, or some other ailment brings more attention and bolsters the momentum of the industry.
But much of the investment and hope for success is based on emotion, analysts say.
``If you're an investor going to a meeting to hear about gallium-arsenide semiconductors, it sounds nice but you don't get too excited,'' Mr. Kunz says. ``But if you go and hear about a cure for cancer or baldness you really get emotionally into it, and that also fuels the market.''
As the public mind is prepared in this manner to receive the coming wave of new drugs, the beliefs of industry-watchers are reinforced that multibillion dollar markets for ``huge categories of drugs'' will indeed appear in the 1990s.
``The public is really going to start feeling the impact from 1995 to the year 2000,'' says Luther Smithson, former director of biotechnology at SRI International, now vice-president and chief operations officer of Plant Cell Research Institute, a joint venture between SRI and Italy's Montedison.
``These are 21st century drugs that we're talking about.''
Mr. Smithson says that until wonder drugs and wonder profits do emerge, the industry will continue to scramble to venture capitalists and the public markets for cash to meet its huge research and development demands.
``Right now the industry is running on its ability to raise money,'' Mr. Smithson says. ``It is thriving on salesmanship, hope, futures, excess cash available for risky investments, and people investing on a portfolio basis.''
Genetics project takes aim at frostbusting strawberries
Wrapped in an impermeable white outfit, thick padded booties, gas mask and gloves, a technician for Advanced Genetic Sciences Inc. looks more like a toxic-waste inspector than someone spraying a few strawberry plants in a northern California field.
Inside his ordinary looking spray can, though, is a radically different product called ``Frostban'' - a genetically altered form of common bacteria. Pasted on his suit is a circle with a slash across a snowman making him a ``Frostbuster.''
Still, the test in April was quite serious. The stuff he carried in his spray can lacked the gene that normally allows frost to attach itself to strawberries, lowering the freezing temperature several degrees.
Despite local worries that man-made bacteria might run wild in nature, there has not been any evidence so far of environmental damage.
AGS hopes to gain federal approval to market Frostban by 1990.
This is perhaps the most visible example to date of the agricultural potential of biotech research. If it succeeds, and Frostban works as billed, the potential savings to strawberry farmers is huge, somewhere in the hundreds of millions of dollars. The potential profits to AGS would be staggering as well.