By Justin Gillis / The Washington Post /

Saturday, December 31, 2005

WASHINGTON — Shares of the nation’s largest biotechnology companies are trading at or near record levels as the year comes to a close, a payoff for investors in companies that have been putting intensive focus on cancer and other hard-to-treat diseases over the last few years.

The American Stock Exchange biotechnology index, which tracks some of the largest companies in the industry, hit a five-year high during the trading day Tuesday, powered by optimism over recent or impending treatment approvals at the Food and Drug Administration. Shares of the industry’s bellwether company, Genentech Inc., hit their highest point ever earlier this month, though they’ve pulled back a bit since then.

Analysts said the large biotech companies, which include Genentech and a handful of other big names, such as Amgen Inc. and Gilead Sciences Inc., are beginning to replace traditional pharmaceutical stocks in the holdings of many investment funds that want a piece of the growing health care market.

The strong performance is largely confined to the high end of the biotech industry — the companies that have put blockbuster drugs on the market and have grown into vast enterprises with thousands of employees and drug factories humming night and day.

The Amex index, which tracks the performance of these companies, is up 110 percent since bottoming out in mid-2002, compared with an increase of 30 percent over the same period in the Standard & Poor’s 500-stock index. For 2005, the biotech index is up 25 percent, while the broader market, as reflected by the S&P 500, rose a mere 4 percent.

By contrast, a separate index that reflects the share prices of smaller biotech companies, the Nasdaq Biotech Index, has essentially mirrored the broader market, up about 3 percent for the year.

The traditional drug industry hit a rocky patch this year: Merck & Co., once the world’s most respected drug company, is defending itself against a slew of lawsuits claiming it hid safety problems with its Vioxx painkiller. And the next couple of years don’t look much brighter for the big pharmaceutical companies, with numerous drug patents due to expire, potentially costing the industry billions of dollars in revenue.

“The Mercks and Pfizers are no longer unlimited growth machines,” said John McCamant, editor of the Medical Technology Stock Letter in Berkeley, Calif. “Interestingly enough, it looks like Amgen and Genentech are. We’ve had a changing of the guard.”

The century-old drug industry has historically used chemical techniques to discover its products, whereas the 30-year-old biotechnology industry has used genetic techniques. The latter approach is paying off for the leading companies, with a string of spectacular drugs for cancer and other tough diseases coming to market recently. And the companies have managed to sell them at extraordinary prices, sometimes exceeding $50,000 a year for each patient.

The split between big companies, with their rising stock prices, and smaller fry, with nearly flat prices, was reflected not only on the national scene but also in the Washington region.

MedImmune Inc., of Gaithersburg, Md., with an important preventive drug for respiratory disease in babies, was up 29 percent for the year, closing Thursday at $35.04. By contrast, Human Genome Sciences Inc., a Rockville, Md., company that gets plenty of publicity but has yet to put a drug on the market, was down 31 percent for the year, closing Thursday at $8.32.

Genentech, of South San Francisco, Calif., was the first biotech company, founded in 1976. It struggled for years, but recently has been on a roll. Genentech now sells the world’s top-selling cancer drug, Rituxan, and a recently-approved Genentech cancer product, Avastin, looks set to surpass it.

Genentech revenues are approaching $7 billion a year. An old-line pharmaceutical company, Pfizer Inc., takes in more than that from Lipitor, the world’s best-selling medicine. But Genentech is growing faster, and long-term growth potential seems to be what health care investors are looking for.

“Genentech had an incredible year as the company nailed one positive clinical trial after another in what is the best string of positive trial news we have ever seen in the biotech industry,” McCamant wrote in a recent edition of his newsletter.

The company’s stock is riding so high, in fact, that some investment professionals are worried. Morningstar Inc., the independent research firm, pegs “fair value” for Genentech shares at $70, compared with Thursday’s close of $92.06, and Morningstar rates the stock as a sell at current prices. “Genentech has had a long and impressive streak of good fortune, but drug development is probability-based, and odds are that the company will witness a setback at some point,” Morningstar analyst Jill Kiersky wrote recently.

Some analysts have a similar concern about the broad market in biotech shares. Merrill Lynch, Pierce, Fenner & Smith Inc. warned investors in a recent report that with many new cancer drugs coming to market, competition is stiffening. “The increasing availability of new cancer drugs to treat a variety of cancers is great for patients, but the market is becoming more crowded and it is becoming more difficult” to design convincing studies that can supplant previous treatment regimens, the brokerage house said.

McCamant has been urging his readers to focus their investments on smaller, undiscovered biotech companies with potentially valuable products under development. He figures that small companies will have more room to run in 2006. “You’re looking at an industry that can’t be judged with a rearview mirror, because it’s moving forward so fast,” he said.

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Affy Shares Climb 7.8 Percent on S&P 400 Listing
By a GenomeWeb staff reporter

NEW YORK, Dec. 28 (GenomeWeb News) - Shares in Affymetrix were up 7.8 percent, or $3.41, at $47.12 in mid-afternoon trading today after Standard & Poor's said it will add the company to its S&P 400 Index.

ABI Licenses Affy Microarray Patents for Gene Expression Analysis

By a GenomeWeb staff reporter

NEW YORK, Dec. 22 (GenomeWeb News) - Applied Biosystems has licensed "a number" of Affymetrix patents "related to the manufacture, sale, and use of microarrays for gene expression analysis," the companies said today.

Applera, the parent company of Applied Biosystems, has taken a non-exclusive, worldwide license to the patents.

ABI said that it will use the licenses to expand its Expression Array system and to enable customers "to use that system for gene expression, research and development purposes."

The companies did not disclose further details of the licensing agreement.

ABI's Decision to License Affy's Array IP Tops Most-Read GenomeWeb News Stories Last Week

By a GenomeWeb News editor

NEW YORK, Dec. 27 (GenomeWeb News) - What are GenomeWeb News subscribers reading? Below are the five most-read articles for the five-day period ended Friday, Dec. 23.

ABI, Continuing Pledge to Grow Consumables, Plans to Acquire Ambion’s RNA Business for $273M in Cash

By a GenomeWeb News staff reporter

NEW YORK, Dec. 27 (GenomeWeb News) - Applied Biosystems plans to acquire Ambion's research products division for around $273 million in cash, the companies said today.

With the acquisition, ABI gains entry into the consumables market for sample prep, RNAi, microRNA, and gene expression and array products.

"This acquisition is an important component of Applied Biosystems' strategy to drive growth by expanding our consumables product offering," Cathy Burzik, president of ABI, said in a statement today.

The deal, which is subject to regulatory and other condition, is expected to close in the first quarter of 2006.

The business ABI hopes to acquire develops and supplies consumables for stabilizing, synthesizing, handling, isolating, storing, detecting, and quantifying RNA. New products include microRNA and siRNA reagents used to study mechanisms of gene expression.

The market in which this business plays is believed to be around $500 million market and grows more than 10 percent annually, according to ABI. Independent figures could not immediately be obtained.

Ambion's diagnostics and service businesses will become a separate standalone company, Ambion said.

According to ABI, Ambion stands to generate more than $52 million in revenue in 2005, which would be a 22-percent improvement over last year's receipts.

Founded in 1989, Ambion's research division has approximately 300 employees. Ambion's research and development, manufacturing, and other operations will continue to be based in Austin, Texas, and report to ABI's molecular biology division.

[Business analysis on PostGenetics is available by appointment - A. Pellionisz, 30th of December, 2005]

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Perlegen, Pfizer Pen Four-Year PGx Partnership; Deal Covers IP Rights, Research Payments

By a GenomeWeb News staff reporter

NEW YORK, Dec. 28 (GenomeWeb News) - Perlegen Sciences and Pfizer have penned a four-year alliance to study whole genomes in an attempt to identity genes linked to undisclosed diseases and drug response, the companies said today.

The announcement, which comes one day after Perlegen disclosed Pfizer bought a 12-percent stake in it for $50 million, calls for researchers from both companies to conduct whole genome studies involving DNA samples from clinical trials. Perlegen will genotype the samples using Affy arrays.

Additional terms of the agreement between Perlegen and Pfizer call for the firms to share "certain" intellectual property rights that could result from the collaboration. Pfizer will provide research payments to Perlegen.

["Whole genomes" is a code-word to include "junk" DNA. In this seemingly "small news" (amounting to half the market cap of GTG) there are several "tell-tale signs". First, it is most unusual to "rush" such a deal in the last days of the year. Second, and more important, if Applera set its eyes on M/A with GTG (even to the limited extent of 25% that GTG Jacobson publicly announced) - Applera is not "the only game in town, anymore". It has become evident that the formerly "controversal, academic" issue of "junkDNA" is now a linchpin in the entirely new business model, replacing the dead "One Gene - One Disease - One Billlion Dollar Pill" paradigm by the "PostGenetics - PostGene Diseases - PostGenetic Medicine" paradigm of the 21st Century. Thus (leapfrogging expectations that "Junk" DNA will be picked up by "Big Information Technology" - although given Bill Gates' comment of yesterday it is not excluded at all), the "Gold Rush" may happen (or have happened already) by "Big Pharma" rushing to "cut their fundamental deals". Since "Big Pharma" was slowed on their track by the old business model becoming obsolete at least since 2003 and "PostGenetic Medicine" carries a price tag as big or even bigger than "Information Technology" (in which both Apple and Microsoft are sort of becoming "entertainment companies" with iPod/Pixar and X-box). With a looming "bidding war" by Applera/Pfizer (with Merck not far behind...) and possibly "Big IT" cutting in (since neither Genome of Big Pharma companies are geared to develop "the Microsoft of PostGenetics"), no wonder that GTG ("GENE" in NYSE) oscillates widely, with ten times of the volume of 3-month average trading. While for shortness of time and Holiday Season it is unlikely that GTG is already pondering over written offers in a "bidding war", the jittery Wall Street may know something that most people don't. - Business analysis is available by appointment. - Comment by A. Pellionisz, 29th of December, 2005]

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Pfizer Buys $50M Stake in Perlegen; 12-Percent Ownership Could Grow If IPO Launched

By a GenomeWeb staff reporter

NEW YORK, Dec. 27 (GenomeWeb News) - Pharmaceutical giant Pfizer invested $50 million in Perlegen Sciences, the private biotechnology company disclosed today.

The equity investment, in the form of preferred stock, gives Pfizer 12-percent ownership in the company.

If Perlegen executes an initial public offering in 2006, Pfizer has agreed to purchase up to an additional $25 m