Investors Turn Their Backs on Two New Texas Biotech Companies

Just a day earlier, Celera Genomics pushed up the biotech sector.
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Just a day after

Celera Genomics

(CRA)

pushed up the biotechnology sector with its

announcement that it had decoded the DNA sequence of a human chromosome, investors turned their backs Friday on two new Texas biotechnology companies which stand to benefit from the DNA sequencing.

Lexicon Genetics

(LEXG)

, a company that defines gene functions to discover drugs, fell 21% after going public Friday and

Tanox

(TNOX)

, which develops antibodies to attack specific cells, rose less than 1% from its opening price by mid-afternoon.

Lexicon, based in The Woodlands, Texas, fell 4 9/16 to 17 7/16 after hitting a high of 24. (Lexicon closed down 3 1/4, or 15%, at 18 3/4).

The company and lead underwriter

J.P. Morgan

raised $220 million through the offer of 10 million shares at the initial price of $22 a share, the bottom end of its $22 to $24 range.

Lexicon uses a technology called gene trapping to alter the DNA of genes in a variety of mouse cells, which can be cloned and used to generate mice. In these cloned mice, the altered DNA "knocks out" the function of the gene, enabling the study of the function of the knocked-out gene. From this process, researchers obtain DNA sequences of genes from both human and mouse cells. Lexicon has formed a large library of these genes to farm out to other researchers and companies.

Lexicon has established collaborations with

Millennium Pharmaceuticals

(MLNM)

, the

R.W. Johnson Pharmaceutical Research Institute

(a subsidiary of

Johnson & Johnson

(JNJ) - Get Report

) and

Searle

, a unit of

Pharmacia

(PHA)

.

Revenues grew 111% to $4.7 million while losses increased $5 million to $12.5 million from 1998 to 1999. Research and development costs increased 74% to $14.6 million over the same period.

Gordon Cain, a director on the board, owns about 30% of the outstanding shares.

Baylor College of Medicine

owns 12%.

Houston-based Tanox rose 1/4 to 28 3/4 and stalled there in afternoon trading. (Tanox closed at 28 1/2).

CIBC World Markets

underwrote the offering of 7 million shares at $28.50 per share.

The company identifies and develops monoclonal antibodies that fight infectious diseases and cancer. Tanox's principal choice for becoming a pharmaceutic is an asthma drug called E25, being developed and marketed in collaboration with

Novartis

and

Genentech

(DNA)

. E25 has successfully completed Phase III clinical trials for both allergic asthma and hay fever. Genentech and Novartis are expected to file for marketing approval in the U.S. and Europe in mid-2000, according to Tanox's registration with the

Securities and Exchange Commission

.

While relying heavily upon the two larger biotechnology companies for almost all its revenues, Tanox's relationship with them is on the rocks. The company notes in its filing with the SEC that it is involved in litigation against Genentech and Novartis over the rights to develop products covered under the collaboration agreement.

A judgment against Tanox could mean the loss of rights to independently develop products under the collaboration.

Additionally the company lost a round of arbitration regarding a fee dispute with their former attorneys who represented them in a 1993 lawsuit against Genentech and

F. Hoffman-La Roche

and its affiliates, and a 1994 lawsuit filed against them by Genentech.

The arbitration panel issued an award which entitled those attorneys to receive approximately $3.5 million, including interest, payments ranging from 33 1/3% to 40% of any future milestone payments received from Genentech following product approval and 10% of the royalties received on sales of anti-IgE products, another of its drugs in development. Tanox intends to pursue all available remedies, including appealing the decision, the SEC document said.

Revenues, primarily from license fees, milestone payments and sponsored research under collaboration agreements, decreased 42% over the period between 1998 and 1999. This decline was primarily due to a difference of $1.3 million in milestone and sponsored research revenues from agreements with Novartis and Genentech.

These agreements accounted for 76% of revenues in 1999 and 98% of revenues in 1998. Tanox made no money from the commercial sale of these products and doesn't expect to until 2001.

Research and development costs increased to $17.1 million in 1999 from $11.9 million in 1998. Net losses for 1999 were 23.3 million vs. a loss of $10.1 million in 1998.