Biotechnology investors are hoping for a repeat of last year's blockbuster performance by the sector, and once again, many expect the IPO market to lead the way. With two biotech offerings scheduled to price this week and 25 more currently in registration, the industry is one of the few areas of high technology making any noise.

"We've had a downtime where we haven't had a lot of IPOs," says Faraz Naqvi, M.D., portfolio manager for the Dresdner RCM Biotechnology Fund (ticker symbol : DRBNX), which returned a mammoth 81 percent in 2000. "We haven't had investment bankers banging down the door [at privately held biotechnology companies] saying: 'You have to go public now.' We're in a very welcome period [of the market] and I think that the quality of companies coming at the middle part of this year will be excellent."

While no one expects the volume of last year -- 76 deals raising a combined $7.3 billion -- to be matched in 2001, investor demand for new biotechnology stocks is expected to continue, albeit at a slower pace. For unlike the dot-com companies that flooded the IPO market in 1999, biotech companies aren't dreamed up overnight, funded by the end of that week, and pushing a product to market by the end of the month.

"These are not hand-to-mouth companies," says Steven Burrill, chief executive officer at Burrill & Company, a private merchant bank in San Francisco focused on the life sciences industry. According to Mr. Burrill, there is a fairly broad base of 30 to 50 companies that could tap the IPO market this year.

That may represent the tail end of a sector-wide financing cycle that started at the end of 1999, gained momentum in 2000, and will continue this year. Intense interest in biotechnology stocks after the cracking of the human genome pushed the Nasdaq Biotechnology Index (Nasdaq: IXBT) up 23 percent last year versus the Nasdaq Composite's 39 percent loss.

IN DEVELOPMENT

Like any other time the IPO window reopens, bankers push the strongest offerings out first. As a result, Mr. Naqvi believes that investors need to be prepared to act once these stronger companies begin courting investors through new stock offerings. And it would appear that there should be a healthy mix of investment alternatives. The mix of deals in registration range from drug developers and the platform companies that supply them with services and equipment to medical device manufacturers. Although strong offerings are expected to emerge from each segment, there are definitely better times for each of the three to come out of the pipeline.

"In these jittery markets, the companies that will suffer are the platform companies," says Mr. Naqvi. "But in times of prosperity, these same stocks perform the best."

This was the case last year for platform companies such as 3-Dimensional Pharmaceuticals (Nasdaq : DDDP), Deltagen (Nasdaq : DGEN), and Rosetta Inpharmatics (Nasdaq : RSTA), each of which gained 27 percent on their opening days of trading, only to see their stocks fade with the overall market. Undoubtedly, this cyclical phenomenon will factor into early demand for offerings from the platform counterparts in the pipeline such as Third Wave Technologies, Cellomics, and Doubletwist as the overall market strengthens.

But that does not mean that the drug developers in the pipeline such as OMP or Seattle Genetics will not gain the attention of investors -- especially since many in this segment performed quite well in the aftermarket last year.

UNDERSTANDING THE INDUSTRY

One of the most successful offerings last year among the drug developers is also Mr. Naqvi's current favorite: Praecis Pharmaceuticals (Nasdaq : PRCS). Although the Cambridge, Massachusetts-based company's April IPO only captured a 10 percent return on its first day of trading, Praecis's stock finished the year at $29.25, a 192.5 percent gain over its $10 offering price.

"They have a drug-discovery method that to us seems like they are going to be churning out drugs, one after the other, for the foreseeable future," says Mr. Naqvi. The company's combinatorial development process, which allows for mass testing and mass creation of compounds, has already paid off. Just last week, the Food and Drug Administration gave Praecis's new drug for treating prostate cancer fast-track review priority, which requires the FDA to complete its review process within six months of the drug's submission. As such, the new drug is expected to hit the market before the end of the year.

"Something like Praecis is easy to understand -- they are addressing prostate cancer and they have an exciting drug. People can understand that and hold onto that," says Mr. Naqvi. "But people have a harder time understanding platform companies, which are very dependent upon deals [with pharmaceutical or biotechnology companies] that they can't disclose."

BROADER STRENGTH

The success of new deals from platform companies like Exact Sciences (Nasdaq : EXAS), Xenogen (Nasdaq : XGEN), and Third Wave, as well as drug developer OMP, all of which are scheduled to price over the next two weeks, will serve as an important litmus test for the industry. Their success could signal the start of a broader, sector-wide period of new equities issuance.

As investor interest in IPOs grows, some of the companies that went public in 2000 will begin to set plans in motion for secondary offerings. Praecis's management, for example, already announced plans last week for a follow-on offering.

The IPO market is also still seen as an important gateway for merger and acquisition (M&A) activity. If the sector regains the attention of investors like it did last year, Mr. Naqvi expects to see a number of deals surface before valuations once again become lofty. Although there is always talk about pharmaceutical companies filling their pipeline by acquiring smaller drug developers, Mr. Naqvi suggests that M&A deals in 2001 will involve large drug developers swallowing their smaller counterparts.

While large pharmaceuticals still control the crucial marketing channels for getting drugs into the hands of consumers, Mr. Naqvi feels that biotechnology companies are slowly beginning to realize that they really should be dictating M&A activity since they are the ones controlling all the research-and-development plans -- the real ingredient for success in the industry. As such, he expects strategic partnerships, rather than mergers, to be the topic of discussion between the pharmaceutical and drug makers this year.

At the end of the day, venture capitalists, pharmaceutical companies, and the entire investment community understand the industry's need for more capital. In the wake of an aging baby-boomer population, the need for alternative treatments and cures to long-standing medical illnesses such as cancer, diabetes, and Alzheimer's are greater than ever. Whether or not investors believe that in 2001 biotechnology stocks will repeat their strong performance of last year, the reality is that long-term investors will be rewarded by the companies in today's IPO pipeline that are working toward these solutions.