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Investors are wild about biotechnology; Stocks: Enthusiasm runs high over future profits in an emerging industry, creating market valuations in the billions.

THE BALTIMORE SUN

Biotechnology has roared back into favor on Wall Street. In a big way. Make that a huge way.

After several years of being shunned by investors, the industry, which is focused on developing new drugs and other medical treatments by replicating and manipulating the body's own defense and repair systems, is now on fire.

Investors are flocking to the risky sector, share prices are soaring, and so are the values of executives' stakes in their companies and their stock-option packages.

"I haven't seen this kind of enthusiasm for biotech since the early '90s. It's really amazing," said Alan Auerbach, a biotechnology analyst with First Security Van Kasper.

That enthusiasm -- or "frothy effervescence" as one industry expert calls it -- is being driven by several factors: a wave of new drug approvals, the closing race to map the human genome, low interest rates, and investor zeal for anything high-tech, say experts. It persists even though many biotech companies continue to post vast losses.

Among those that have seen their stock price shoot through the roof are Human Genome Sciences Inc. and PE Corp.-Celera Genomics Group, two Rockville companies that are smack in the middle of a biotechnology niche that investors are wild for: genomics, or the study of human genes and the role they play in controlling or causing disease.

The genomics sector was ignited, say analysts, by the announcement last month by Celera's president and gene research pioneer J. Craig Venter that his company has completed mapping 90 percent of the human gene map. He believes the project will be finished this year.

PE Celera, which was split off from parent Perkin-Elmer Corp. as a tracking stock April 28, has seen its shares rise a stunning 1,500 percent since June to a high of $270 a share Jan. 24. At that price, a hundred shares purchased June 24 for $1,418.75 -- just over $14 a share -- would have sold seven months for $27,000.

Celera, which trades on the New York Stock Exchange, plans to ride the rally even further, splitting its stock 2-for-1 this month and selling another 1.6 million shares in a second public offering later this year.

While not as spectacular, Human Genome Sciences rose from a 52-week low of $28.75 last February to a high of $232 last month on the Nasdaq before its Jan. 31 2-for-1 stock split. It's also capitalized on the rally by raising more than $500 million in three private placement financings since June.

The biggest industry gainer on the Nasdaq since Feb. 1, 1999, is Medarex Inc.

Shares in the New Jersey concern, which is developing a way to make antibodies better at fighting human diseases, have shot up 1,285 percent in the past 12 months. A block of 100 shares purchased in March for $287.50, or $2.875 a share, could have been sold Jan. 24 at their $72-a-share peak for $7,200.

Though Medarex, Human Genome and Celera now have market valuations in the billions, none is profitable. In fact they are burning through cash at a rapid clip and will continue to do so for the foreseeable future.

Human Genome has a market capitalization of $4.6 billion, despite losing $24 million during its first nine months last year. Celera, which is less than a year old, has a market value of $5.9 billion and lost $43.7 million in the first six months of its fiscal year.

"It's definitely one of the hottest sectors right now," said Evan Sturza, who has followed the industry for a decade and is founder of Sturza's Medical Investment Letter and Ursus Capital, an investment service.

Bigcharts.com ranks the industry the third-hottest, ahead of communications, during the past three months, gaining 44 percent overall, as a number of factors converged.

In periods of relatively low interest rates, such as now, investors historically favor stocks over fixed-income securities such as bonds despite the higher risk. Plus the growth of the Internet and dot-com companies has fanned enthusiasm generally for emerging technologies, Sturza said.

Add to that the expectation that a map of the human genome -- the full set of 100,000 to 150,000 human genes -- will be completed soon, and you have investors madly driving up shares of gene research companies such as Affymetrix Inc. and Incyte Inc. on the expectation that the map will yield a bounty of medical breakthroughs and new drugs. Despite investors' rush to get in early, analysts caution that such drugs could be years away and that it's not clear which companies will be winners.

More fundamentally, say analysts, the sector's resurgence has been driven by the growing ranks of companies getting drug products approved by regulators and turning profitable.

Alexander Cheung, senior portfolio manager for Bethesda-based Monument Funds Group's Medical Sciences Fund, says the rally is being driven primarily by new drug approvals. Twenty-two new drugs, vaccines or expanded indications for existing treatments were approved by the Food and Drug Administration last year.

Cheung also points to a record 350 biotechnology drugs in clinical trials, a significant portion of which he believes are destined for marketing approval. "Over time we'll have even more profitable companies. The critical mass that's been missing in the industry is building."

Among recent biotechnology drug approvals are Tamiflu, Gilead Sciences Inc.'s new flu drug; Centocor Inc.'s Remicase for hard-to-treat arthritis; and Ligand Pharmaceuticals Inc.'s Targretin cancer treatment.

"It's no longer Amgen out there alone as the only profitable biotechnology company," said Sturza. "We've now got MedImmune, Biogen, Idec and a handful of others with strong products on the market and profitability. Investors now understand and believe that this industry is going to have big, profitable companies."

G. Steven Burrill, chief executive officer of San Francisco-based Burrill & Co., a merchant bank active in the life-sciences sector, says the current rally was sparked last summer when Roche Holdings, the parent of drug giant F. Hoffman-La Roche Ltd., spun off its 23-percent stake in biotechnology stalwart Genentech Inc.

The 21 million-share offering in the South San Francisco concern was a roaring success, raising close to $2 billion. It was followed in October by another 20 million-share offering, which raised $2.8 billion. "That really got a lot of big investors' attention, and they began giving biotech another look," said Burrill.

Burrill said investor enthusiasm for the industry has picked up steam in the past few months, opening financing opportunities for biotech companies that had long been closed.

Institutional investors again became willing to put money into the established companies -- a shift that allowed Baltimore-based Guilford Pharmaceuticals Inc. to raise $45 million in a private placement in September, and allowed Human Genome's two big private placements.

More recently, initial public offerings, long shut to the industry, again became possible. Since mid-November, five companies have conducted successful IPOs. The most recent occurred Tuesday, when Sequenom Inc. raised $260 million -- $50 million more than initially projected.

As further evidence of the ebullience for the genomics sector, shares in the Waltham, Mass., company, which uses a proprietary technology to locate genes with rare chemical codes, rocketed 205 percent in their first trading day to close at $79.25.

The rally has been so deep, said Burrill, that it has boosted shares of even small biotechnology concerns, not just companies with profits or name recognition.

"It's really been quite awesome how broad the rally has been. In some ways it defies logic," said Burrill.

Among small companies whose shares have rebounded are Guilford and Gene Logic Inc.

Gene Logic Inc., an unprofitable Gaithersburg company that helps drug companies look for genes that are active during diseases, has seen its share price rocket 1,500 percent in three months to a high of $71.50 Jan. 28.

The company's stock rebound is attributed by analysts to impressive presentations executives made last month to institutional investors for a second public offering that raised $270 million Wednesday -- a record for a secondary offering by a biotechnology outfit.

Guilford, which bought back 150,000 shares of its stock in the spring and summer when shares were trading under $12, has also bounced back. Share prices have doubled.

Dr. Craig R. Smith, Guilford's president and chief executive officer, believes investment is returning to the sector in part because pension fund and mutual fund managers are recognizing the long-term potential of companies with well-focused business plans and strong technology platforms.

Seasoned institutional investors, said Smith, "are looking for companies with compelling technology and diversity in their pipelines, so that if something fails it doesn't undermine the entire company. The one-drug companies aren't in favor."

Indeed, not all biotech companies' share prices have gained in the rally.

For example, shares in Martek Biosciences Corp. of Columbia, which makes an infant formula additive from micro-algae, have remained flat for the past 12 months, trading between $11.75 and $12.25.

But more than a few biotechnology executives have become multimillionaires several times over in the span of a few months -- at least on paper, given their stock holdings and option packages.

For example, the 2.52 million shares in Human Genome that Chairman and Chief Executive Officer William A. Haseltine holds are worth about $252 million, based on last week's post-split trading average of about $100 a share. Venter's 356,000-share stake in Celera is worth more than $7 million, and his 1.5 million stock options make him on paper wealthier than Haseltine.

Others have taken the dramatic gains in their companies' share prices as an opportunity to cash in options and make millions in profit. David Mott, chief financial officer at Gaithersburg-based MedImmune Inc., sold 106,000 option shares in August for $10.45 million, pocketing about $8.8 million before taxes and other charges, according to First Call/Thomson Financial.

Some experts believe biotechnology stocks are considerably overvalued, and their recent run-up in price has been driven in part by indiscriminate buying.

"I'd say 75 percent of the sector's stocks are overvalued right now," said Sturza, the analyst. "People are paying 10 times what someone else paid for the same stock a year ago, yet there's no sound reason for it."

"We will have a correction at some point," agrees Cheung at Monument. "But the valley just won't be as long and deep as it has been in the past."

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