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News > Companies
Biotech: one-hit wonders?
October 27, 2000: 3:57 p.m. ET

They have drugs on the market and they make money. That's the good news
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - It's not easy being a big biotechnology company these days.

While some upstart companies with only the promise of earnings down the road are seeing their share prices surge and Wall Street analysts swoon, some leading biotech firms with actual products on the market - and profits too -- are facing a bit of a backlash. Both Amgen Inc. (AMGN: Research, Estimates) and Biogen Inc. (BGEN: Research, Estimates), two industry bellwethers, both reported third-quarter profits that exceeded forecasts, but warnings that sales of their top products are slowing sent investors fleeing.

Industry analysts say the situation reflects the risky nature of the sector and the growing interest in new types of biotech companies. Thousand Oaks, Calif.-based Amgen derives the lion share of its revenue from only two products, while Biogen, of Cambridge, Mass., has only one key drug that drives its sales.

While these products are blockbuster success stories for the entire industry, the companies that created them are particularly vulnerable when sales don't live up to Wall Street expectations. The introduction of a rival product or loss of patent protection for a top-selling drug also poses risks, often making such stocks far more volatile than other types of investments that have more diversified offerings.

"It has historically been the business model of the biotechnology companies to have one product, either on the market or in development," noted Timothy Bepler, portfolio manager of the Orbitex Health and Biotech Fund. "The first thing we learn in investing is diversity, and that's the same thing with businesses, that you don't want to put all of your eggs in one basket."

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Biotech companies would prefer having a more diversified product portfolio, of course, but that's easier said than done.

Companies need to make huge investments in both time and money into research and development to bring even one new medicine to the market. Clinical failure for experimental drugs also is also high. While big biotech companies are aggressively developing their pipelines, it can take years to see any results.

Prudential Securities earlier this month announced a rare "sell" rating for a stock, cutting shares of Biogen after the company posted lower-than-expected sales of its flagship drug, muscular sclerosis treatment Avonex. The brokerage became increasingly dubious about the company's earnings prospects for next year amid Avonex's sales woes, said John Sonnier, a biotech analyst at Prudential.

For a large-cap pharmaceutical firm with a dozen products on the market, a slower growth forecast for one drug might be better tolerated. But for Biogen, which got about 78 percent of its total revenue last year from Avonex, Wall Street won't shrug off a shortfall on one product so easily. The company, however, is developing a successor to Avonex in cooperation with Irish drug company Elan Corp. (ELN: Research, Estimates), a development that could open the door to a wide new market for the company.

Amgen, meanwhile, gets about 93 percent of its sales from two products, Epogen, an anemia treatment, and cancer treatment Neupogen. Analysts say the market for both drugs is leveling out, cutting into the medications' growth potential.

Amgen's shares fell about 13 percent Friday afternoon, losing $9.13 to $59.38, after the company released a third-quarter financial report that warned about full-year growth prospects for Epogen and Neupogen. Amgen's woes also sent the rest of the sector tumbling, with the Nasdaq Biotechnology Index down about 6 percent.

Other biotechs that rely on one main product for the majority of their revenue include Seattle-based Immunex Corp. (IMNX: Research, Estimates), which receives about 68 percent of its annual revenue from Enbrel, a rheumatoid arthritis drug. Sales of blockbuster child respiratory illness treatment, Synagis, account for about 76 percent of Gaithersburg, Md.-based MedImmune Inc.'s  (MEDI: Research, Estimates) annual sales.

Bepler said his fund targets biotech companies with new business models, including platform technology companies such as Millennium Pharmaceuticals Inc.  (MLNM: Research, Estimates) that are developing more systemized ways of discovering drug compounds using genomics research. The fund also invests in gene-analysis equipment makers, like PE Biosystems Group   (PEB: Research, Estimates), which supplies tools to the drug industry to mine the human genome instead of developing medicines itself.

"It has always been an ambition of biotech to become more diversified, but not until technology got getter were they able to do that," he said.

For biotech companies that rely on one main revenue source, that model likely will continue, noted Sonnier. But, he said, expect merger and acquisition activity as well as joint alliances with large pharmaceutical makers to intensify in the coming years as biotechs look to broaden their revenue base. Back to top

  RELATED STORIES

Amgen beats 3Q earnings estimates

Biogen beats 3Q estimates - Oct. 10, 2000

Mutual fund focuses on volatile genomics sector - Oct. 9, 2000

Biogen in pact with Ireland's Elan - Aug. 17, 2000

Can biotech make a buck? - July 24, 2000

Amgen names new CEO - May 11, 2000

Immunex stock jumps on drug approval news - June 7, 2000

Cephalon's hyperactivity drug fails new trial - July 31, 2000

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.