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Executive Summary

Synergen's sensational 173% net gain in stock price during 1989 over-the-counter trading symbolizes a revival in the popularity of big bets on future potential. In last year"s across-the-board boom market for medical product companies, a good story for the future appeared to have more appeal than current sales success. Reversing a 40% drop in 1988, Synergen gained 8-1/4 points to close 1989 at 13. The Boulder, Colorado firm's bold ascent was the top percentage gain performance among the 56 issues tracked in the monthly index of O-T-C pharmaceutical and related issues followed by "The Pink Sheet." Synergen's climb began in May with three major announcements: * Synergen was first to the clinic with a recombinant wound healing agent, its basic fibroblast growth factor (bFGF), fo topical ulcers. (Phase II studies have begun with initial results expected in the first half of 1990). The bFGF rights were reacquired from former partner DuPont in late 1988. FGF is also in preclinicals for neurological conditions, including Alzheimer's. * The company began a development agreement with Colgate-Palmolive for genetically-engineered anti-plaque enzymes. The program had been under the auspices of the National Institute of Dental Research at the National Institutes of Health. * Late in May came the biggest news: a collaborative effort with Hoffmann-La Roche to develop its interleukin-1 inhibitor, IL-1i, for inflammatory and autoimmune diseases such as rheumatoid arthritis, with Roche working on oral analogs of IL-1i. Synergen's good fortune was part of a larger pattern on Wall Street: 1989 saw a resurgence in investor enthusiasm for biotechs. Of 21 biotechs on the "F-D-C" O-T-C Monthly Index, only four suffered declines from last year. The 36 pharmaceutical stocks on the index jumped 59.2%, doubling the Dow's advance of 27% and the S&P 400 (up 25.6%). Nine pharmaceutical stocks did better than the 59% component gain and 17 companies' stocks in the index overall turned in increases of more than 50% for the year. The progress of the IL-li research has made the project Synergen's largest. In its third quarter report to shareholders, the company noted that "in animal models for rheumatoid arthritis, septic shock and other inflammatory diseases, the molecule continues to show that it can prevent the development or reverse the symptoms of disease induced by external agents." Under the Roche agreement, Synergen retains clinical development and manufacturing responsibilities and U.S. co-promotion rights; the company will receive manufacturing fees and royalties. Analyst Robert Peterson (of the Denver firm Hanifen Imhoff) estimated in June that Roche funding for the project could total $30 mil.-$35 mil. over the next three to five years. * In September, the relationship with Roche got a personal touch. Roche VP-Licensing and Corporate Development Jon Saxe, a patent attorney, joined the firm as president, CEO and board member. Larry Soll remains chairman. The company also has a collagenase inhibitor FIBAC (fibroblast anti-collagenase) compound in preclinicals for rheumatoid arthritis, control of malignant solid tumors and corneal ulcers. The project is part of a private R&D partnership, Synergen Development Partners, Ltd. Another major R&D collaborative effort also continued to make progress. Synergen's deal with Ciba-Geigy to develop a human elastase inhibitor (SLPI) for treating emphysema and other respiratory conditions is in preclinicals with human clinicals for emphysema expected by late 1990. Synergen also has collaborative contracts with Lilly for livestock vaccines and Getty Scientific for enhanced oil recovery chemicals. Discounting the effect of anticipated or actual research or benchmark payments from the Roche, Ciba, Lilly, Getty Scientific and Colgate contracts, Synergen is still in the enviable position of being financially sound despite having no product revenue stream. As of Sept. 30, the company had cash and marketable securities of nearly $31 mil. Synergen's expenses through nine months were nearly $11 mil. The firm's next major need for financing will probably be a scaled-up production plant, maybe in 1991-1992. A mark of Synergen's bright 1989 was its jump to a year-end valuation of $113.4 mil. The company's strong stock and financial picture was mirrored by Immunex and Centocor, both of which took advantage of the boomlet to spin off anti-inflammatory disease R&D companies via secondary stock offerings. Immunex (up 60.4% at 19-1/4) climbed in the autumn on the company's product swaps with Kodak, Behringwerke and Syntex and the establishment of the inflammatory and autoimmune disease R&D unit, Receptech Corp. Together, the deals put Immunex in a fairly assured financial position. The $30 mil. stock offering for Receptech should suffice the R&D unit through mid-1992. In the autumn, Immunex said it had $60 mil. in cash on hand for its CSF product development. In deals with Kodak (Sterling) and Behringwerke, the Seattle-based firm gained co-marketing and manufacturing rights to granulocyte macrophage-colony stimulating factor (GM-CSF) and interleukin-3 (IL-3) in the U.S. and exclusive U.S. marketing and manufacturing rights for IL-1 and IL-4 receptors further back in the pipeline. Immunex has announced plans to market its own branded GM-CSF under the name Leukine. Immunex also reacquired rights from Syntex for IL-1 alpha as a cancer therapeutic. Centocor, which gained 10 points (66.7%) to close 1989 at 25, similarly established an R&D spin-off. Tocor, funded at $27 mil. through early 1992 from a July stock offering, was established for R&D in rheumatoid arthritis, multiple sclerosis and systemic lupus erythematosus using two monoclonal antibody-based products, Centams and Centara. The Tocor offering took some of the burden off of Centocor's diagnostics business having to continue as the source of funding for its drug R&D pipeline. The Tocor project also frees up expected revenues from Centocor's first U.S. therapeutic product, Centoxin. * Centoxin continues to be the big draw for Centocor and was one of the more eagerly awaited announcements for investors interested in biotechs with near-term products and payoffs. In its race with Xoma to bring out the first MAb product to treat the often-fatal hospital-related gram negative sepsis, Centocor was second out of the gate: the PLA for Centoxin was filed Sept. 20, six months behind Xoma's PLA for its MAb-based product, Xomen E5, which is licensed to Pfizer. Centocor is anticipating a late 1990 approval for Centoxin. During 1989, the company also introduced its first pharmaceutical product, the cardiac imaging agent Myoscint in Europe. Being the first to file with FDA can have its drawbacks as Xoma found out last year. The stock swooped upwards by 50% from January for the Berkeley, California-based biotech, peaked in August at 20 with the Ingene merger announcement and then cooled after the announcement of test results for Xomen-E5 and the Centoxin filing. Xoma reported Sept. 18 at the Interscience Conference on Antimicrobial Agents and Chemotherapy that Xomen E-5 reduced mortality by almost 50% in patients with gram negative sepsis. Alex. Brown's David Webber responded with a "strong buy" recommendation on Sept. 21. The rest of Wall Street, however, apparently was expecting a more dramatic effect. That disappointment, combined with the growing spector of competition from Centocor, sent Xoma stock 3/4 lower in September to 19-1/4. Xoma rebounded in October and closed the year ahead 64.2% at 21-3/4. Contributing to the autumn acceleration was renewed speculation in Xoma's favor on the mouse vs. man race between the sepsis monoclonals. Xoma's product is murine (mouse-derived) and Centocor's is human. Xoma also appeared on the verge of approval for its first product, Xomazyme CD5-Plus (formerly H65), for graft v. host disease (GvHD), and investors started to get more excited about its market potential for treating the disease, which is the major limiting factor in bone marrow transplantation. CD5-Plus also got good press from the ongoing, small-scale clinicals as a rheumatoid arthritis treatment. Even more attractive was Xoma's $40 mil. stock swap merger with the chimeric MAb R&D firm International Genetic Engineering. The Ingene merger, announced in August and completed in November, boosted its preparedness to produce and refine future human-like MAb-based antibodies. * The Xoma/Ingene merger was the second major consolidation among biotechs last year, a phenomenon which had its birth in 1989. In April, Genzyme and Integrated Genetics, two Boston-area firms, agreed to merge via a stock swap. The Street liked that idea too: combining Genzyme's profit skills and near-term product potential with IG's research work on protein projects. Genzyme's tight control of the merger and the plans for a fast payback were particularly impressive. By cutting Integrated Genetics' costs in half, selling fertility technology to Ares-Serono for $12 mil. and making use of accumulated tax loss carryforwards, Genzyme may end up getting Integrated Genetics for virtually nothing. Genzyme capped its strong year with a Treatment IND approval for its glucocerebrosidase, Ceredase, in November. The company has stated its intention to charge for the orphan product (for Gaucher's Disease) but has not announced a price in the nearly two months since approval. That delay indicates the difficulty in arriving at a politically and commercially acceptable price for a product during the period of expanded distribution permitted by the approved/not-approved limbo of the Treatment IND. Genzyme has forecast that Ceredase could grow to one of the $50-$100 mil. annual sales orphans. While Genzyme has had difficulty setting a price for Ceredase, the market has had less trouble finding a value for it and for the image of success that goes with the approval. Genzyme was able to go quickly to the investment community for some extra funding: $35 mil. through an R&D partnership for the development of hyaluronic acid products for postoperative adhesions; and $34.15 mil. from a 2.6 mil. share offering through PaineWebber, Kidder Peabody and Cowen & Co. One merger in the biotech business did not pan out in 1989. A February agreement between The Liposome Company and Liposome Technology was called off in May. The break-off of the deal precipitated a decline in the stock of The Liposome Company, which plunged 59.3% to 1-3/8. Late in the year, the company brought in ex-Squibb exec Charles Baker as chairman and CEO, culminating a six-month search. The mergers in the biotech business are one indication of tougher management being imposed on the research cultures of the arly 1980s. Biogen is the archetype of that trend and one that has moved from almost being "Bio-gone" at mid-decade to being "Bio-in" as a Street favorite in 1989. The issue was a 135% gainer in 1989 and that wasn't all of the story. It also went to the Street for significant new financing through a 2.8 mil. preferred stock offering at mid-year, which raised $69 mil. Biogen's prospects include their Receptin CD4 product and Immuneron (gamma interferon). A recent consulting report by A.D. Little on the biopharmaceutical business discussed 13 potential uses of gamma interferon, of which 11 were rated as favorable, good or excellent prospects for the biological ("The Pink Sheet" Sept. 11, p. 20). Biogen continues to participate (through Schering-Plough) in the steadily climbing alfa interferon business and its hepatitis B core antigen licensing success. * Anticipation about products on the cusp of FDA licensing approval propelled a number of other biotech stocks in 1989. Chiron and Cetus were Street winners, in large part from their diagnostics. Chiron's 107.3% gain to 28-1/2 -- fifth best among drug stocks on the index -- was spurred by advances for the diagnosis of hepatitis. Part of Cetus' attraction was the commercial potential for its GeneAmp polymerase chain reaction (PCR) technology, for which the company has received several favorable patents. The stock climbed 22.6% to close 2-5/8 ahead at 14-1/4. In February, Chiron's partner, Ortho received approval for a hepatitis B test kit, and the company began clinical testing of its hepatitis C (formerly non-A, non-B) diagnostic. Chiron rose 1-5/8 to 16-1/2. The stock got another shot in the arm in August (rising 5 to 23-3/4) with the announcement of a licensing agreement for the hepatitis C diagnostic with Abbott. The test is expected to be approved this year. At the close of the year, Chiron also purchased DuPont's $40 mil. in sales AIDS and hepatitis B blood-screening business, catapulting it into the number two slot worldwide behind market leader Abbott. Cetus had a healthy market year (up 22.6%) and is starting to draw some attention for its recombinant interleukin-2 anticancer product (Proleukin). The product could reach the U.S. market, by Cetus projections, as early as the middle of this year. It already has been approved in six European countries (West Germany coming at the beginning of 1990). Cetus also began, through its Cetus-Ben Venue venture, to market the first imported generic form of doxorubicin and received positive publicity in April on word that it expected Phase III trials to be completed in 1990 on its recombinant beta interferon, Betaseron, in combination with AZT for opportunistic AIDS infections. Roche assumed an important funding role in Cetus during 1989. The Swiss company was outbid in a 1988 march-in on Sterling, but it has been increasing its involvement with other companies. With Cetus, Roche will fund R&D work in the diagnostic area based on polymerase chain reaction technology. Roche has called the deal "by far the most far-reaching event of 1989" for the company's diagnostic R&D activities and notes that PCR permits "a degree of sensitivity not previously known." A market review of 1989 would hardly be complete without examining the erythropoietin (EPO) battle royale. The patent fight between Amgen and Genetics Institute was a benchmark for the biotechs; the apparent stalemate after the December court ruling leaves the issue of access to the market still pending. Heavily-weighted Amgen climbed nearly 19% from its 1988 close to 40-1/8 on the last trading day before the June 1 approval of its EPO product, Epogen, for treatment of anemia associated with chronic renal failure. The stock continued to climb despite the uncertain marketing position of the product vis-a-vis competitor Chugai-Upjohn's Marogen. In October, the stock jumped 15-1/2 to 57-1/2 after Amgen reported that 25% of dialysis patients were already taking the product after its fourth month on the market. First year sales were $95 mil. with about 50% of dialysis patients now on the product. Buoyed by EPO despite an unsettling arbitration proceeding with marketing partner Ortho (Eprex brand EPO), Amgen remained in the 57 trading range until December as the deadline for a Boston federal court decision on its patent position over competitor Chugai-Upjohn neared. The stock also got a boost from Amgen's prediction that it would file a product license application (PLA) for its neutrophil stimulant Neupogen before the end of the year. The Dec. 11 decision that Amgen and Chugai-Upjohn licensor Genetics Institute's patents each infringed one another in certain aspects sent Amgen stock on a slide: the stock dropped 7 from its November close of 56 to 49 at year-end. The downward momentum was fueled by speculation that the court decision would, at the least, produce an injunction attempt by Genetics Institute and perhaps an eventual cross-licensing arrangement. Despite the blow, Amgen gained 45.2% for the year and 15-1/4 points from the end of 1988. In contrast to Amgen's December downturn, Marogen developer Genetics Institute's valuation more than doubled during 1989; the stock added 16-3/4 to 34-1/8, ending on a year-long high, and the valuation passed the $400 mil. mark. Each positive hint about Amgen's EPO was reflected by Genetics Institute; the stock jumped 1-1/2 to 26 in June after Epogen was approved and another 2 to 28 in July as Amgen's EPO rolled out. Genetics Institute made preparations for the anticipated commercialization of Marogen with a July offering of 1 mil. shares of $50 convertible exchangeable preferred stock. The offering also was directed at funding development of the company's antihemophilic agent Factor VIII. From its experience with Factor VIII, Genetics Institute is familiar with the concept of cross-licensing that it may face with EPO. In March, Genetics Institute and Genentech decided to put their faith in their respective marketing partners, Baxter and Miles, rather than duke it out in court over patent positions for the blood-clotting factor. Genetics Institute's PLA filing for its Factor VIII is expected this year. The company's GM-CSF product, licensed both to Schering-Plough and Sandoz, should be the other major product license application in 1990. The CSFs could be the next area facing patent disputes. While Amgen (and the erstwhile Genetics Institute) struggled with the issue of marketing EPO, other firms found themselves in less precarious positions with products that were doing well without controversy last year. Medco Research shot up 140.8% to 14-3/4 on the projection and actual approval of the adenosine compound, the injectable anti-arrhythmic Adenocard, which is marketed by Fujisawa Pharmaceutical, the new wholly-owned subsidiary of the Japanese company of the same name. Adenocard set the rhythm for Medco all year. When FDA's Cardio-Renal Drugs Advisory Committee recommended the drug for approval in May, Medco Research went from 6-1/8 to 7-3/4. Following Oct. 31 approval for Adenocard, Medco added another 5-1/8 by year-end. Helping the stock was good preliminary data on an adenosine-based non-invasive cardiac imaging agent, Adenoscan, presented at the American Heart Association annual meeting in mid-November: Medco Research gained another 27% (3-7/8) from November to year-end. Not to be confused with Medco Research, the mail-order prescription order firm Medco Containment Services also had a good year, adding 4-7/8 and closing ahead 36.4% at 18-1/4. Investors have increasingly warmed to the attractions of the mail-order and prescription card services. The company's 36.4% rise followed a 16.3% gain in 1988. The PAID prescription card program, is accepted in more than 54,000 pharmacies nationwide and processes more than 65,000 Rx drug claims per week. Just as the mail-order drug sector has become a more attractive target for investor dollars, so has the wholesaler sector. Durr-Fillauer put together two strong back-to-back years: a 29.3% increase to 32-3/4 last year following a 116.2% leap in 1988. Indianapolis-based Bindley-Western is on the way back from the difficulties unearthed by the drug diversion investigations of 1987. In 1989, the stock recovered nicely (up 47.4% to 10-1/2). The company pled guilty in September to vicarious liability for two former employees who pled guilty in 1985 to crimes including mail fraud and accepting kickbacks. Krelitz Industries was the top percentage gainer among wholesalers, rising 84.6% and gaining 1-3/8 to close at 3. Krelitz divested the James Phillips medical surgical supply and Ulmer Pharmacal skin care businesses in July to focus on acquisition growth in its drug wholesaling operations. Krelitz was named one of the primary vendors for Voluntary Hospitals of America during the year. Arbor Drugs was head and shoulders above the five drug chains tracked by the index, adding 13-1/4 during the year and rising 143.2% to 22-1/2. The Troy, Michigan-based chain was named one of the "200 best small companies" in America by Forbes magazine in November.

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