2002 Preview: Diagnosing Biotech

Once again, the biotech sector pulled out a news-filled year that had a little bit of something for everyone. In 2001, investors were treated to lots of hype -- stem cells and bioterrorism come immediately to mind -- from companies that are still years away from warranting any real attention.

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We had the soap opera that is the Food and Drug Administration, which, when it wasn't rejecting drugs because of its new-found fanatical obsession with safety, seemed to stretch out approval times for months beyond expectations. And yes, it looks as if the FDA will end the year without a commissioner to lead the regulatory agency.

There was some good news, too. Biotech earnings, for the most part, were strong throughout the year, with few of the blowups found in the other technology-oriented sectors. The FDA did get around to approving Scios'(SCIO Quote - Cramer on SCIO - Stock Picks) congestive heart failure drug, the first such new treatment in 10 years. Gilead Sciences (GILD Quote - Cramer on GILD - Stock Picks) won approval for a new AIDS drug, and Idec Pharmaceuticals (IDPH Quote - Cramer on IDPH - Stock Picks) received the thumbs-up from an FDA advisory panel for its new cancer drug. Full FDA approval is expected at the start of 2002.

Generic drugmakers and supporters of lower-priced medicines seemed finally to gain the upper hand against the big pharmaceutical companies. Legislative and legal efforts by big pharma to extend the life of drug patent expirations -- most notably Eli Lilly's (LLY Quote - Cramer on LLY - Stock Picks) Prozac -- failed for the most part, allowing cheaper, copycat versions of products to hit the market.

The American Stock Exchange Biotech Index looks on track to close 2001 down just under 10%, which is not bad considering it still beats the S&P 500 and there's been a nice 37% rally in the average since the market hit bottom after the Sept. 11 terrorist attacks. This year's performance pales in comparison to the 60% gains made in 2000, but considering all that's happened, it could have been a lot worse.

So, what does 2002 have in store? Plenty. Here are a just a few stocks investors should keep their eyes on, as well as some important events that will have an impact in the coming months.

Stocks to Watch

ImClone Systems : Will its highly publicized experimental cancer drug, Erbitux, gain FDA approval or not? This is going to be the biggest biotech event in 2002, especially now that the FDA has thrown a whole toolbox into the works by refusing to accept ImClone's application for the drug. What was looking like a sure-thing approval in 2002 could now very well be pushed back into 2003.

All the positive news leading up to this FDA setback had been very good for ImClone shareholders -- the stock was up almost 70% for the year until rumors of trouble started taking their toll in December. With the recent selloff, Imclone finished the year essentially flat. If 2002 goes as badly as 2001 ended, investors could be in for some more pain. Pass the popcorn; this one will be fun to watch.

Interneuron (IPIC Quote - Cramer on IPIC - Stock Picks): A sleeper stock poised for a breakout. Left for dead after the fen-phen diet-drug disaster, Interneuron picked itself up off the floor and started developing a new antianxiety drug called Pagaclone. The company inked a partnership with Pfizer (PFE Quote - Cramer on PFE - Stock Picks), and at an analyst meeting held by the drug giant last week, Pagaclone shined. The drug has best-in-class potential (read billion-dollar revenue) because it seems to work well on a variety of anxiety disorders, but also doesn't carry the negative side effects of current treatments.

Interneuron shares are up an incredible 740% this year, despite grabbing little notice from Wall Street's sell-side community. Pagaclone is one of Pfizer's most important late-stage drug candidates. It may not reach the FDA until 2003, but the stock should appreciate nicely as it gains more of a following on Wall Street.

Icos (ICOS Quote - Cramer on ICOS - Stock Picks): This one is a tough call. The big news here is the expected FDA approval of Cialis, a new drug for erectile dysfunction that will take on Pfizer's Viagra. (The marketing battle for the loins of middle-aged, impotent men should be one for the ages!)

But there's a hitch. Icos' Cialis partner, Lilly, has run into a bit of a manufacturing problem with the FDA. If the issues aren't cleared up fast, the FDA might not approve Cialis in 2002, as expected. Icos shares were up a respectable 20% in 2001, but if a Cialis delay stretches well into 2003, it might be Icos' stock that goes limp.

And Don't Forget

Biogen(BGEN Quote - Cramer on BGEN - Stock Picks), Idec Pharmaceuticals, ViroPharma(VPHM Quote - Cramer on VPHM - Stock Picks), Transkaryotic Therapeutics (TKTX Quote - Cramer on TKTX - Stock Picks) and Genzyme General (GENZ Quote - Cramer on GENZ - Stock Picks) should all hear from the FDA on the approval or rejection of important drugs.

Genentech (DNA Quote - Cramer on DNA - Stock Picks) and Xoma(XOMA Quote - Cramer on XOMA - Stock Picks) should file an approval application for their psoriasis drug in the middle of the year, while Genentech will refile for the asthma drug Xolair by the end of the year.

Want to know how well Amgen's(AMGN Quote - Cramer on AMGN - Stock Picks) plans to acquire Immunex(IMNX Quote - Cramer on IMNX - Stock Picks) might fare? Check out test results of Immunex's drug Enbrel for psoriasis, expected at a major dermatology conference in February. If the results are good, Amgen and Immunex might just meet their bullish growth estimates for the drug.

ImClone is not the only biotech with cancer drug-related news on tap. Expect to hear test results and other news in 2002 from AstraZeneca(AZN Quote - Cramer on AZN - Stock Picks), Genentech, Cell Therapeutics(CTIC Quote - Cramer on CTIC - Stock Picks), Immunomedics(IMMU Quote - Cramer on IMMU - Stock Picks), Celgene(CELG Quote - Cramer on CELG - Stock Picks), Millennium Pharmaceuticals (MLNM Quote - Cramer on MLNM - Stock Picks) and Corixa(CRXA Quote - Cramer on CRXA - Stock Picks).