updated 2/28/2005 6:16:42 PM ET 2005-02-28T23:16:42

The debacle over faulty drugs besetting the pharmaceutical industry has now spread to the biotech sector, with one of its best performing companies and a partner pulling their highly touted multiple sclerosis drug from the market after one patient died and another fell seriously ill.

Shares of Cambridge, Mass-based Biogen Idec Inc., a biotech darling until Monday, lost more than 42 percent of their value in the day’s trading while its Irish partner Elan Corp.’s stock fell 70 percent.

In recent months, investor confidence in pharmaceuticals has been sapped by safety concerns over antidepressants, the recall of Merck & Co.’s blockbuster pain reliever Vioxx and the threat of similar withdrawals of two other painkillers.

Now, industry analysts are fretting that the biotechnology industry could suffer from the same malaise.

“It’s going to make investing in this group of companies much more treacherous,” said Elliot Spar, a marketing analyst with Ryan Beck & Co. “This is a wakeup call.”

The biotechnology industry had been enjoying two years of rising stock prices and upbeat financial forecasts through 2004 while the pharmaceutical industry stumbled through one drug problem after another.

Biotech stocks rose a combined 16 percent last year, according to G. Steven Burrill of San Francisco-based Burrill & Co. At the same time, the Dow Jones U.S. Pharmaceutical Index fell 10 percent.

But as 2005 began, the biotechnology industry began to show its own signs of distress. Its combined market capitalization fell 4.6 percent in January, according to Burrill.

There was already concern amid biotech companies that the pharmaceutical industry’s setbacks had placed the Food and Drug Administration on the defensive.

“The FDA is under pressure to scrutinize drug approvals even more carefully,” Burrill said. “This is likely to translate to more exhaustive and costly clinical trials both for big pharma and biotech.”

Flu failure
The biotech industry has also had its share of stumbles, beginning with Chiron Corp.s’ announcement late last year that it would fail to deliver half the nation’s vaccine stockpile for the latest flu season.

Then in January, Amgen Inc. chief executive Kevin Sharer said the world’s largest biotechnology company could not sustain is phenomenal growth in 2005, in part because of uncertainty over how Medicare reimburses doctors who prescribe the company’s cancer drugs.

But none of those industry slips compared to what happened on Monday when Biogen and Elan shocked the industry by announcing the withdrawal of their highly touted drug Tysabri.

Shares of Biogen, the third largest biotech company behind Amgen and Genentech Inc., closed at $38.65 on the Nasdaq Stock Market on Monday, losing $28.63. Biogen’s previous 52-week low was $50.87.

Until Monday, Biogen was a biotech darling and among the top performing biotechnology stocks over the last 10 years, returning more than 65 percent since 1995, according to Morningstar Inc.

Elan closed at $8 on the New York Stock Exchange, losing $18.90 a share. The share price of a third biotechnology company, Protein Design Labs, expected to share in the sales of Tysabri, fell 14 percent to close at $13.56 on the Nasdaq.

The FDA approved the drug in November and Tysabri accounted for $3 million in sales for Biogen in 2004 while Elan rang up $6.4 million in sales in the fourth quarter, counting on Tysabri to help restore it to profitability by next year.

Elan chief executive Kelly Martin told reporters in Ireland on Monday that the drug has been withdrawn as a precaution and that the companies hope to resume marketing it later this year.

The companies said the decision came after recent reports of two cases of serious effects among patients who used the drug along with Avonex, Biogen Idec’s earlier MS treatment, in clinical trials.

“At this stage it’s not a huge impact on the current prospects of either company,” said Biogen chief executive Jim Mullen “But it’s safe to say there was a lot of expectation around Tysabri for both corporations.”

Mullen had earlier forecast that Tysabri sales would reach $1.5 billion annually by 2007.

“It’s definitely possible it does not make it back on the market, if it does its market potential is reduced,” said Jason Kantor, an analyst with WR Hambrecht & Co. “I think this is something of a permanent black eye.”

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