Bad News Sends Biotech Sliding

News of revenue shortfalls and massive layoffs sent many tech stocks reeling last week, and Wall Street is now bracing for a longer-than-expected economic downturn.

As a result, the Nasdaq Composite continued trending lower. The Nasdaq Biotech Index (IBB - Cramer's Take - Stockpickr) appears to be following suit, with not-so-good news on June 12 from Amgen (AMGN - Cramer's Take - Stockpickr), Praecis (PRCS - Cramer's Take - Stockpickr) and Affymetrix (AFFX - Cramer's Take - Stockpickr).

Drug Dip The Nasdaq Biotech Index dropped after several companies reported bad news

Back in December, Amgen and Praecis submitted a drug application to the Food and Drug Administration for Plenaxis, a prostate cancer treatment that was granted fast-track review, which implied that a full review letter could be expected by June.

Well, the time came, and the outcome was much different from what the firms had expected. On June 12, Food and Drug Administration regulators sent Amgen and Praecis a letter stating that their application for Plenaxis was inadequate for approval.

Praecis' share price took a dive on the news. It closed at $22.59 the day before the announcement, and was trading Thursday at $15.05, rebounding off its 52-week low of $12.75. Amgen's share price has remained steady, and was trading Thursday at $66.27.

The clinical data on Plenaxis looks impressive. Amgen and Praecis can still get FDA approval for the drug, though it might be delayed. In their first-quarter conference review this year, both companies said they expected to receive FDA approval by the end of 2001. This goal is still achievable, because the companies plan to meet with the FDA to clarify the problems cited in the agency's letter, which have yet to be disclosed. Amgen will more than likely remedy the situation, because it has an excellent relationship with the FDA. So if you're a risk-taker, Praecis' share price potentially has great upside if Plenaxis is approved.

Also on June 12, Affymetrix warned that second-quarter revenue would come in between $44 million and $50 million, compared with Wall Street's estimate of $58.1 million. In addition, the company could not give financial guidance for the rest of the year because of sporadic ordering by several of its big pharmaceutical accounts, but said it would update investors in July. The magnitude of the shortfall, particularly for the remainder of the year, appears to have gone beyond what anyone expected. This isn't comforting, to say the least.

Although the second quarter may get messier than expected, the high-density microarray business (a system or series of gene/biochips) at Affymetrix is still showing strength. It's worth noting, however, that the demand for biochips and the way they are used may be changing.

Right now, biochips are usually used to sequence the human genome and key animal models, but that application is a one-time deal. Companies therefore need to find other uses for biochips, such as enabling researchers to examine the effects of diseases, environmental factors, drugs and other treatments on thousands of genes simultaneously.

Frost & Sullivan, a marketing consultant company, for example, has cited projections showing that the biochip industry will surpass the $3.3 billion revenue mark by 2004, with the largest share of dollars garnered by the microarray segment. The current market for DNA microarray technology, including both chips and arrays, is about $600 million.

So what does the future hold for Affymetrix? The stock is unlikely to stage a meaningful recovery until Wall Street has a better feel for when conditions will improve. Hopefully, additional insight will be given on July's conference call to reassure investors it's only a blip and not a trend.

Meanwhile, Affymetrix continues to cite a product recall and sales weakness on a do-it-yourself kit as problems that will have greater impact over the balance of 2001. Affymetrix sees a slowdown, but won't give financial guidance for the remainder of the year.

Last quarter, the company estimated revenue for fiscal year 2001 to come in at $261 million, but it's now uncertain whether it will meet that projection. Thus Affymetrix shares are likely to come under considerable pressure, so investors might think twice before picking them up.

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Last week, Celera Genomics (CRA - Cramer's Take - Stockpickr) announced its intent to acquire Axys Pharmaceuticals (AXPH - Cramer's Take - Stockpickr).

Axys is a drug discovery company that was spawned from the merger of Arris and Sequana in 1997. The company has only one drug in human trials, with the remainder of its product pipeline in the very early stages of development. Several of Axys' drug programs have been discontinued in the past few years, from compounds for asthma to psoriasis.

Thus, it will be a while yet before investors know if Celera will be successful once it completes its acquisition of Axys and transforms itself from a genomics company to one that discovers drugs. So, with Celera, it's best to wait and see how the new strategy works out. To succeed, Celera will need to get into the drug development business, because that's where the money will be made by commercializing new therapies to treat diseases. Axys' success rate in developing new drugs has been limited and, unfortunately, Celera has no experience in that area.