Should you double down on biotech?

By Jon Markman

Gamblers, psychics, speculators and coin flippers: Mark your calendars, one and all, for a date likely to be the most spectacular one-day investment event in the first half of 2007.

On May 15, a week and a half from today, years of scientific research, venture investment, hope and prayer will result in an up-or-down vote from federal drug regulators on a prostate-cancer therapy developed by Dendreon (DNDN, news, msgs), a small Seattle biotech company.

If the answer is yes, Dendreon can begin marketing a drug that could bring in as much as $1 billion a year, and the company's shares will soar. If the answer is no, then the company will be sent back to the drawing board with a big, smokin' hole in its pocket and shares down 90%. Hero or goat, in the blink of an eye.

The binary nature of the U.S. Food and Drug Administration decision -- heads you win, tails you die -- is typical of the crazy world of biotechnology, a market sector more suitable for Las Vegas than Wall Street. Odds of winning at roulette are probably better than the odds of winning with biotech companies. It's the lure of the quick, gigantic buck that lures folks into both.

Warning: May cause undue optimism

The game has gained heightened allure recently, as Dendreon shares tripled in a day of trading last month after a positive decision from a panel tasked with investigating the therapy. Shares of MedImmune (MEDI, news, msgs), a veteran biotech company focused on respiratory disease and cancer vaccines, jumped 80% last month when it received a buyout offer from AstraZeneca (AZN, news, msgs).

These flashy advances resonate with novice investors, as they make biotech look like easy money. But they truly are as rare as a moment of silence at a casino. Just look at the biggest, most powerful names in the industry: Genentech (DNA, news, msgs), Genzyme (GENZ, news, msgs) and Amgen (AMGN, news, msgs) have sat out the broad market's entire 20% rally from last summer's lows, sinking 1%, 4% and 8%, respectively, though they're up a bit lately.

The grave problem with biotech investing is that it appeals as much to your heart as your mind. It appeals to your optimism, to your spirit as a buoyant, can-do capitalist. Biotech investors who do their homework always feel they have logical reasons for what they consider intelligent wagers on pharmaceutical science, and that is why the sector appeals to many bright people.

But the reality is that most fatal illnesses remain as stubbornly resistant to attack today as in the days of Hippocrates. For every therapy that the FDA approves for human consumption -- creating billion-dollar companies and millionaire shareholders -- there are hundreds that it rejects, creating unending pain and tremendous losses.

At this moment in time, there are 116 public biotech companies whose shares are up at least 1% in the past 12 months. Yet there are 165 more that have suffered losses in the past year. That's sad but not tragic. Where it gets ugly is at the extremes, as there are 20 that have suffered losses of 40% or worse in the past year. Just eight have gone the other direction and doubled, and most of those are already well off their highs.

Conflicting results

Dendreon is the poster child for what's wrong with biotech investing for most sensible people with limited investment funds: Its researchers have tackled a terrible disease, which kills 27,000 men a year, in an innovative, seemingly brilliant way. Its lead product candidate, called Sipuleucel-T by scientists and Provenge by the marketing department, is designed to stimulate a patient's own immune system to battle advanced metastatic prostate cancer.

This is an awesome idea because unlike conventional chemotherapy and radiation treatment, it's not a highly toxic compound that makes patients sick while they try to recover. Moreover, patients don't have a lot of choices. The most common treatment, a drug called Taxotere from Sanofi-Aventis (SNY, news, msgs), doesn't work so well and causes miserable side effects such as nausea, hair loss and mouth sores.

The problem is that while Provenge has been found to prolong the lives of patients with advanced prostate cancer by four months, in one clinical study reviewed by a company-sponsored panel of scientists, it didn't meet its primary goal of slowing the spread of the disease. There are also questions about whether the trial was lengthy enough or included enough patients.

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