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Biotech: feeding the hype
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May 19, 1998: 3:17 p.m. ET
Biotech stocks get a lift from cancer drugs, but analysts warn of backlash
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NEW YORK (CNNfn) - The swirl of good news surrounding cancer drugs in recent weeks has given biotechnology stocks a shot in the arm, as investors hitch their wagons to the progress of science and promise of huge returns.
Most, of course, are hoping to hit it big with the company that eventually develops a cure for the deadly disease -- a product market valued in the billions of dollars.
Shares of EntreMed Inc. (ENMD), for example, a then little-known biotechnology company in Rockville, Md., rocketed 330 percent earlier this month on news the upstart firm found a cure for cancer in laboratory mice. At one point, EntreMed shares soared to 85 before closing at 51-13/16, up 39-3/4. The company's product has not yet been tested on humans.
More recently, shares of Genentech (GNE) climbed 3-9/16 to 73-9/16 Monday following positive test results of the company's Herceptin breast cancer drug. The drug is expected to get the green light from federal regulators later this year.
According to the S&P sector scorecard, biotechnology stocks are up about 11 percent year-to-date and drug company stocks are up more than 27 percent. Those figures compare with a 15 percent year-to-date jump in the broader S&P 500 index.
While promising and exciting, many analysts worry the hype is getting ahead of technology.
"All of a sudden everyone has a cancer drug in clinical trials, and many of them do, but they are nowhere near going into humans," said Matthew Geller, an analyst following Genentech at Oppenheimer & Co. in New York. "I find it disquieting. In terms of drugs that really do something for cancer itself, we've really seen nothing out of biotechs so far in terms of revenue."
Geller added investors are in a dangerous game where stock values have become "detached from reality" and that the current rally in biotech stocks has largely been driven by "provocative journalism."
"This is reminiscent of a period about five years ago when (National Basketball Association star) Magic Johnson got AIDS and any company with anything to do with AIDS research went up," Geller said. "Those companies that didn't have anything legitimate later collapsed."
To be sure, the news released by EntreMed and Genentech is encouraging.
And with most biotechs still in the red, good news is all investors have to go on.
"These stocks are very manic, either over-extended on the high side or under-extended on the low side," said David Steinberg of Volpe, Welty & Co. "As of late, cancer stocks have done quite well."
Shares of AVAX Technologies (AVXT), for example, rose 11/16, or more than 17 percent, to 4-5/8 at midday Tuesday on the Nasdaq following news that the Los Angeles biopharmaceutical firm had shown its vaccine could shrink malignant lung tumors.
Not all companies get a lift from good news, however. Shares of Onyx Pharmaceuticals (ONXX) in Richmond, Calif., fell 1/2 to 11 per share, a 4 percent drop, mid-day Tuesday on the Nasdaq following positive test results for its pancreatic cancer and gastrointestinal cancer drug.
Risk vs. reward
Biotechnology companies that make it past the clinical-trials hurdle still must spend millions of dollars and countless years trying to convince the Food and Drug Administration of their product's safety and efficacy. Most require funding from pharmaceutical firms to stay afloat during research and development.
Even then, there's no guarantee of FDA approval.
The Biotechnology Industry Organization in Washington estimates that each new drug launched costs an average of $300 million to $400 million to develop and takes about eight years to move from clinical trials to commercialization.
"Modern day biotechnology is only about 20 years old," said BIO spokesman Dan Eramian. "Five years ago there were only 32 (biotech-derived) drugs on market. Now there are 65 drugs and vaccines on market."
Another 250, he said, are awaiting FDA approval.
To be sure, the risks are significant. But so are the rewards.
"I think in EntreMed's case the science involved is very important and has to be applauded and all the rest, but in terms of providing a drug it's many years away," said BioVest Research Inc. analyst Eddie Hedaya. "In some ways it is unfortunate because it has put EntreMed in a position that going forward will be difficult to maintain expectations. It's a long road ahead and they will have to pass through the same pitfalls and hurdles as everyone else."
Nonetheless, good news is still good news.
Hedaya said positive clinical-trial results have helped build excitement in biotechnology and rejuvenate the sector.
The payoff for early investors in a company that does develop a significant cancer therapy is huge, he added.
He cited Taxol, the billion dollar cancer drug sold by Bristol Myers.
"I think that any drug which is oral and has no side effects which suppresses tumor growth will have huge potential," he said. 
--by staff writer Shelly K. Schwartz
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EntreMed
Genentech
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