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Let's just forget about 2002, shall we? Baby New Year 2002 hadn't even taken her first breath before investors were mauled by the

ImClone Systems

(IMCL)

fiasco. It went downhill from there. Biotech and drugs stocks slumped, clinical trials failed, the Food and Drug Administration appeared in disarray, deal-making ground to a halt and cash became a precious commodity.

Sure, there was some good biotech and pharmaceutical news to be found out there, but it seemed hard to notice amid the carnage.

But hey, it's time to put 2002 to rest and look ahead. With 2003 fast approaching, the slates are wiped clean. Investors have a long list of upcoming events in both the biotech and drug sectors to focus on; there's a new commissioner at the FDA who's just getting started; stock valuations aren't necessarily out of whack; and heck, there's even a chance the deal-making engine might sputter back to life.

Long Line at the FDA

The first half of the year is chock-full of market-moving events for both the biotech and drug sectors.

Genentech

(DNA)

will keep investors busy. As expected, the company met year-end deadlines by filing approval applications for two products, the psoriasis drug Raptiva and Xolair for asthma. Phase III study results for the experimental cancer drug Avastin in colon cancer will be released midyear; as will phase III results for Tarceva in nonsmall cell lung cancer patients. Tarceva is being codeveloped by

OSI Pharmaceuticals

(OSIP)

.

ImClone. Yes, the battered and bruised biotech firm gets a second chance in the first quarter, when data from a European study of Erbitux should be made public. Results from this study will largely determine the rest of ImClone's year -- full speed ahead to FDA filing redux, or more months of waiting?

Most of the headlines coming out of Big Pharma in 2002 focused on a dearth of new drugs and the hit to earnings caused by generics. That might change in 2003. Investors will be watching close as a slew of new drugs hit the market.

Bristol-Myers Squibb

TheStreet Recommends

(BMY) - Get Bristol-Myers Squibb Company Report

will be launching the schizophrenia drug Abilify,

Schering-Plough

(SGP)

and

Merck

(MRK) - Get Merck & Co., Inc. Report

will comarket Zetia as the latest cholesterol-lowering blockbuster, while

Eli Lilly & Co.

(LLY) - Get Eli Lilly and Company Report

stocks the pharmacy with Forteo for osteoporosis and Strattera for attention deficit hyperactivity disorder.

Let the impotence drug wars begin. Pfizer's Viagra will finally get competition from Cialis, developed by Lilly and

Icos

(ICOS)

; as well as Levitra, marketed by

GlaxoSmithKline

(GSK) - Get GlaxoSmithKline Plc Report

and

Bayer AG

.

On the medical technology front, the biggest splash will come from

Johnson & Johnson's

(JNJ) - Get Johnson & Johnson Report

drug-coated stent, dubbed Cypher. An FDA approval and launch is expected in the first quarter.

Finally, some of biotech's most volatile stories should finally see some closure in the first half of the year. We already mentioned ImClone, but the list also includes

Genta

(GNTA)

,

InterMune

(ITMN)

,

Medicines Co.

(MDCO) - Get Medicines Company Report

,

Vaxgen

(VXGN)

and

Biopure

(BPUR)

.

Unclogging the Regulatory Pipeline

After two years with an empty chair at the top, the FDA enters 2003, finally, with a new commissioner in place. Mark McClellan has a lot of work to do, mainly because the FDA spent most of the past year on everyone's hit list.

McClellan has said that one of his main priorities will be to make sure new products get to market as soon as possible. Whew, what a relief, jokes Ira Loss of Washington Analysis, a regulatory research outfit. After all, "No one expects a new commissioner to stand up and say he wants drugs to take longer to get to market," he says.

Loss believes McClellan, like most past commissioners, can't have much direct impact on the drug approval system, especially in the short term. But what he can do is be a leader, someone who takes charge in way that deflects criticism of the agency and boosts the morale of the rank and file regulators so they can do their job as efficiently, and speedily, as possible, says Loss. Remember that FDA bashers in the last year screamed about agency drug reviewers who seemed unwilling to stick their necks out because there was no one at the top to protect them.

If the FDA crawls out of its shell, biotech and drug companies could benefit. McClellan must also complete the agency's previously announced reorganization, which aims to streamline the drug approval process; and he has to attract new talent to the agency, as well as promote good people from within, says Loss.

"McClellan is smart and well liked," he adds. "He's never had a management job so he'll be closely watched, but I think the industry and everyone else is cautiously optimistic."

Any Urge to Merge?

A rash of biotech mergers at the end of 2001 raised the hopes of some sector mavens that we'd see many more deals in 2002. That didn't happen. There were similar calls amongst Big Pharma watchers, and while Pfizer is buying

Pharmacia

(PHA)

, the rest of the sector remained fairly quiet.

What about next year? Many of the same predictions (and hopes) for more deal making are being made now, but in some ways, the climate seems more conducive now than in the past. For example, there are a lot of biotech companies cutting costs due to dwindling cash stockpiles -- often a precursor to consolidation.

John McCamant, editor of the Medical Technology Stock Letter, hopes to see more deals borne from necessity, not desperation. As an example, he points to this month's purchase of

Triangle Pharmaceuticals

(VIRS)

by

Gilead Sciences

(GILD) - Get Gilead Sciences, Inc. Report

. Triangle has a promising AIDS drug already in front of the FDA, but it really needed to hook up with a larger, more experienced company in order to make the most of the drug when it hits the market.

"Deals like this create better biotech companies," he says.

Carl Gordon, partner at the health care fund Orbimed Advisors, is not entirely optimistic that 2003 will see a significant uptick in deal-making activity.

"Buyers are in a very conservative mood. They're looking at a lot of cheap stuff out there right now, but the risk-taking mentality isn't there. That must change before a significant number of deals get done," he says.

As for the shuttered IPO and financing window, McCamant hopes it stays that way. "We're still digesting the last IPO class and to be honest, I think the tougher times will focus the industry," he says. "There's money out there for those who deserve it."

As for Big Pharma, the guessing games continue. Takeover speculation continues to swirl around Bristol-Myers Squibb, with perennial buyers like GlaxoSmithKline,

Aventis

(AVE)

and

Novartis

(NVS) - Get Novartis AG Report

in the mix.

Values Find the Floor

The Amex Biotech Index is set to shed more than 40% of its value this year, the second straight down year for the widely followed index. In fact, you have to travel back to 1993-1994 to find the last time the index fell for two consecutive years.

The decline has hit biotech investors hard, but by many measures, these beaten-down stocks aren't necessarily undervalued. In fact, based on historical averages, biotech valuations are in line with historical ranges. Unfortunately, the genomics bubble of 1999-2000 distorted valuations, so the necessary correction from those lofty and unsustainable heights is really just ending.

Based on his number crunching, Lazard biotech analyst Joel Sendek sees the seven largest biotech firms trading in a price-earnings-to-growth ratio range of 1.3 to 1.9 for the near future, compared to a historical PEG of 1.6. That implies a range for the Amex Biotech Index of 300-425, he says.

What gets the sector back into positive territory? Pretty simple, says Sendek -- a nice run of positive clinical and regulatory news to overcome the recent string of setbacks.

Investors should pay very close attention to the upcoming J.P. Morgan Chase H&Q health care conference, which takes place Jan. 6-9. This gathering of the biotech tribe helps to set the investment tone for the remainder of the year. Remember that last year's highlight -- or lowlight -- was the first public appearance of ImClone's then-CEO Sam Waksal, coming on the heels of the FDA's rejection of Erbitux.

But with that said, biotech stocks typically take a long time to recover from the New Year's hangover. Over the past 10 years, the average, first-quarter rate of return for the biotech sector is minus-6.4%.

As for Big Pharma, the Amex Drug Index is poised to close down about 22% this year, its worst single-year performance over the last 10 years. Looking ahead, it's hoped that some new drug launches and easier year-over-year comparisons will start to get earnings moving in the right direction.