Gilead Slides as Biotech's Bad Vibe Builds

The company gets good news about an important product, but shares skid amid a tech selloff.
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Gilead Sciences

(GILD) - Get Report

shareholders should be happy today. But there's not much joy to be had in this market.

Not Enough
Tracking Gilead's slide

The Foster City, Calif., biotech, and its marketing partner

Roche Holding

won

Food and Drug Administration

approval to sell Gilead's Tamiflu influenza drug to prevent the disease, significantly broadening its market. That adds to last year's approval as a treatment for people who have the common winter virus.

So what did the shares do? They fell $4.63, or 6.6%, to $65.63. And in spite of the looming flu season and a much-publicized flu vaccine shortage, Gilead shares have fallen 40% in the past two months.

Bad November

The Gilead share fall is emblematic of the falling-back-to-earth of many biotechs, which have mostly outperformed the

Nasdaq Composite Index

for much of this year. Now, in spite of a raft of autumn medical and investor meetings that usually boost share prices, many stocks have suffered significant losses in recent weeks.

Among the worst hit are genomics companies like

Celera

(CRA)

and

Millennium

(MLNM)

, both down by about 50%, and

Human Genome Sciences

(HGSI)

, down 35%. But now product companies like

Vertex

(VRTX) - Get Report

and Gilead are being hit by sour investor sentiment and worries over all things macro. The Nasdaq biotech index was down 8% Monday amid a broad-based tech selloff.

Living and Dying
The year in biotech stocks

"For these stocks, good news isn't having much of an effect right now," says Tim Bepler, fund manager for

Orbitex Health and Bioscience Fund

, who said he's looking to add to his holdings in beaten-down stocks like

Affymetrix

(AFFX)

, Celera, Vertex and

Protein Design Labs

(PDLI) - Get Report

. "The momentum is very negative."

Psychology

The Tamiflu expanded approval, which some analysts say could triple the potential number of patients for the drug, could normally be expected to give Gilead stock a boost, even though some observers view Monday's news as mainly a psychological plus.

Tamiflu was approved in October 1999, only a few months after its main competition,

Glaxo Wellcome's

(GLX)

Relenza, a drug in the same novel "neuraminidase inhibitor" class of drugs. But Tamiflu, which is generally considered to be more effective, quickly rose to dominate new treatments in last year's flu season, giving Gilead $9.1 million in royalties for fiscal 2000. Gilead got a royalty rate of about 14% on sales last flu season.

While that's still a small portion of Gilead's $169 million in total 1999 sales, the sales gains represent an important endorsement of its technology. The pill isn't meant to replace vaccines, which have been in short supply and distributed mainly to elderly and other high-risk patients this year.

"By many estimates, the drug is more of a psychological driver of the stock than a true value driver," says John Sonnier, analyst with

Prudential Vector Securities

, in a recent note. Or, as one New York short-seller put it, "Roche holds most of the economic value of Tamiflu."

The Real Fun

So the drug isn't enough to bring Gilead to profitability, and it's still unclear whether insurance companies and health care providers will reimburse for the drug as a preventative, although a Roche spokesman said the carriers did pay last flu season for Tamiflu as a treatment. The drug wholesales for $49 for a 10-day course of treatment.

Downer
Biotech's slide

But while Gilead investors may not take pleasure in any stock boost from Tamiflu's brightened future, the pending barrage of direct-to-consumer ads may be fun.

Last year, Glaxo ran a series of television ads featuring Neuman of

Seinfeld

fame as an uninvited flu virus into people's homes. While market watchers said Neuman didn't do any more for Relenza sales than he did with dating, the campaign added luster to the promise of biotech, if not the reality.

"In biotech, the fantasy is always better than the reality," says Michael Margolies, CEO of

Avalon Research

in Boca Raton, Fla.