A year ago, buysiders shifted their interest toward companies developing products and away from toolkit companies. The shift in the interim has been even more profound, not just toward companies with potential products but toward companies with real products, real earnings and significant market capitalization. In other words, the buyside is finally treating biotech like a real industry. The change could leave some existing public companies as orphans (or casualties), but the ultimate outcome is likely to be a healthier sector ready for the prime time of the public markets.

Buyers of biotech stocks are increasingly moving to companies over $1 billion in market cap and those that are profitable or likely to become so in the near term with significant product revenues. The shift may reflect a fundamental change in the public markets, as investors put their money in "blue chip" biotech stocks yielding pharmaceutical industry-like returns rather than venture-stage companies with higher risk.

"What the market's looking for is any biotech with earnings, or earnings in the near term," said Franklin Templeton portfolio manager Kurt von Emster. "We found that any company over $1 billion and earning money right now has gone up an average of 60 percent year to date, and that has drawn momentum investors. There's very little buying in companies with earnings in 2000 and beyond, so we're still cautious about that group."

Sandra Panem said the Vector Later-Stage Equity Fund also is buying more mature companies. "What we're looking for are companies where we can see visibility to doubling market cap within the year, and we think the companies that have that capacity are the ones with catalysts that the market will feel are significant. All of those are companies with later-stage products and no capital risk of their being unable to complete the program."

She pointed to the success of Triangle Pharmaceuticals Inc.'s (VIRS, Durham, N.C.) recent $48 million private placement as an example of a company with upcoming meaningful late-stage milestones coupled with sufficient capital to reach those events.

"We're looking predominantly at companies that we think can achieve a market capitalization in the $600 to $800 million range that will then be attractive to non-specialist investors," Panem added.

von Emster said that in order to perform as well as biotech indexes that are weighted by stocks such as Amgen Inc. (AMGN, Thousand Oaks, Calif.) and Immunex Corp. (IMNX, Seattle, Wash.), funds have to invest in companies with earnings growth approaching that of pharmaceutical companies. "If you're trying to figure out where the next dollar of investment is going to go, it's hard to ignore that it's going into large cap," von Emster said.

Stuart Weisbrod of Merlin Biomed Asset Management is putting his money into the more mature companies. As a result, his hedge fund, which was started last April, was up 57 percent in 1998. MedImmune Inc. (MEDI, Gaithersburg, Md.) and Biogen Inc. (BGEN, Cambridge, Mass.) were his biggest winners last year, and his AMGN investment also did well.

Samuel Isaly of OrbiMed Advisors also pointed to larger cap companies with near-term profitability as the sound biotechnology investment. "We published a survey some weeks ago on profitable companies in 1999, and there were 21 of them, with a 25 percent sustainable growth rate for that group of 21," Isaly said "The rap in big biotech is pretty much that they're one product companies and that the sustainability of profitability is in question. But for all 21 together that's not a question."

OrbiMed estimates that the group of 21 will have a total net profit of $2 billion in 1999, Isaly said, noting that Elan Corp. plc (ELN, Dublin, Ireland) and Alza Corp. (AZA, Palo Alto, Calif.) are not in his list. "And we didn't believe everybody's earnings estimates," he added.