Keep an Eye on ICOS

With a soft economy, Wall Street anticipated that drugs would be a haven. But both the Nasdaq Biotech Index and the American Stock Exchange Pharmaceutical Index have sunk, wiping out the past-quarter gains. The Food and Drug Administration's failure to approve Pharmacia's (PHA Quote - Cramer on PHA - Stock Picks) parecoxib sodium for treating pain, along with other disappointments, has rattled drugmakers and scared the market.

In light of the losses, investors are wondering whether the biotech sector can recover. I believe the answer is a resounding yes. First of all, dramatic valuation swings are nothing new for biotech.

There will be product failures for any drugmaker. Those kinds of events draw short-lived negative attention, from which biotech stocks have repeatedly recovered. Volatility is simply part of the equation, and it will not be factored out until many more companies have products that have cleared regulatory hurdles and are on the market.

On the other hand, the big drugmakers are going to face major business concerns: relentless pressure to produce two to three major drugs a year, declining revenue from best-selling drugs whose patents are expiring and greater pressure from government and insurance companies when it comes to drug pricing. Big Pharma needs to find drugs to spur growth because the era of big drugmakers having annual returns of 15% to 20% is probably over.

I focus on the long-term outlook in biotech, although many investors look to the sector as a short-term play. One way to minimize the risk in biotech stocks is to know the details and understand the facts.

With this in mind, ICOS (ICOS Quote - Cramer on ICOS - Stock Picks) is a company worth considering for aggressive biotech investors. Its share price has remained steady even though the company posted a first-quarter loss of 29 cents and is expected to maintain a loss for 2001.

So what is keeping ICOS shares afloat? Its product pipeline -- specifically Cialis, a treatment for erectile dysfunction. ICOS and its partner Eli Lilly (LLY Quote - Cramer on LLY - Stock Picks) on June 28 filed a new drug application with the FDA, and also recently filed for European approval.

What Floats ICOS' Boat? This biotech firm is producing a drug to treat erectile dysfunction

Cialis will compete with Pfizer's (PFE Quote - Cramer on PFE - Stock Picks) Viagra, and so far the company's data show it to be robust with low to minimal side effects. With the FDA sensitive about safety issues involving new drugs, Cialis is probably in an excellent position.

It is unlikely that ICOS and Eli Lilly will disappoint investors because Cialis should receive FDA approval. In fact, ICOS expects accelerated earnings after launching Cialis in 2002. At scientific conferences, ICOS and Eli Lilly have reported that Cialis has fewer side effects than Viagra, and researchers say clinical trials show Cialis works quickly and stays in the body longer than Viagra, whose sales rose 15% to $377 million in the first quarter.

But ICOS' product pipeline doesn't end with Cialis. The company has two other products in clinical trials that could benefit many patients.

Pafase, now in a Phase III trial, could give relief to more than 500,000 sepsis patients in the U.S., while sitaxsentan is in Phase II and III clinical trials to treat the more than 1 million hypertension patients in the U.S. Obviously, I cannot predict the outcomes of these trials, but you can be sure that positive news about either compound could cause significant appreciation in share price.

Summer is usually a slow period for biotechs because medical conferences -- with their accompanying news about new drugs -- follow the academic calendar.

So, if you're anxious for positive news, understand that it won't trickle in until fall, traditionally a strong period for biotech companies. Many significant medical meetings are convened at that time, during which key announcements are made, re-invigorating interest from investors.