Second-Half Biotech: Healing the Wounded

The biotech sector, a furnace of stock-market Darwinism, could be a setting for rebirth in the second half of 2005.

Biogen Idec(BIIB Quote) and Chiron(CHIR Quote) will both be searching for redemption after high-profile disasters. Meanwhile, Amgen(AMGN Quote) hopes to surprise Wall Street with strong earnings and report positive results for drugs that are crucial to its future pipeline.

The highest drama involves Biogen, whose withdrawal of multiple sclerosis drug Tysabri in February lopped 40% off the company's market capitalization and raised survival concerns for its smaller partner, Elan(ELN Quote).

Tysabri was pulled after being linked to a rare brain illness known as PML. While Biogen has absorbed most of the costs related to the withdrawal, the shares have languished as Wall Street discounts lost earnings for the potential blockbuster.

The company remains hopeful that the drug will return to the market after the results of an 8,000-patient safety evaluation are reviewed by the FDA later this summer. The stakes were raised last month when the company reported positive late-stage results on Tysabri in Crohn's disease, an inflammation of the bowel and small intestine.

For now, Wall Street is skeptical about the drug's future.

"We believe that these positive efficacy results will not have a substantial impact on Biogen," wrote Bret Holley of CIBC World Markets in a June 30 note. "We continue to believe that if Tysabri returns to the market, it would be limited to compassionate use in end-stage MS, based on concerns over PML." CIBC does not have an investment-banking relationship with Biogen Idec.

Permanent damage to Tysabri would represent a major loss for Biogen. Still, the company has other profitable drugs that could limit its downside.

Elise Wang, a Smith Barney analyst, thinks sales of Biogen's non-Hodgkins lymphoma drug Rituxan will "continue to remain solid, driven by increasing penetration in existing indications with potential upside in new indications," such as rheumatoid arthritis, according to her June 21 report.