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Revenge of the Biotech Lab Jocks
Biotech stocks trailed their pharmaceutical cousins in 1998, but this year, the situation is reversed
So you don't have a PhD in cell biology (you'd probably be too busy sequencing genes to read this if you did). If counting chromosomes isn't your forte, investing in biotech stocks is going to strike you as something like handicapping a race where every jockey is perched on a dark horse and the track is riddled with divots.
For most of us, in other words, the biotech group is a beaker brimming with risk. Every newly hatched treatment could be a blockbuster drug -- or a dud. Clinical trials and other assorted tests are fraught with peril, and each news release could trigger either a gold rush or a Wall Street stampede away from a company's shares.
So what has biotech done for investors in 1999? Made them plenty of money, that's what. By the end of August, a Standard & Poors index of 24 biotech stocks was up 60.3%, nearly six times the 10.4% mustered by the S&P 500. And stocks with such forgettable names as Biogen (BGEN), Immunex (IMNX), and MedImmune (MEDI) are up 100% or more this year.TAKING OFF. You could say that biotech stocks have simply delivered to investors what pharmaceutical stocks were expected to, but didn't. After 50% gains in 1998, major drug companies shares ran up against proposed caps in Medicare pharmaceutical benefits and impending patent expirations on key treatments. So far this year, those two worries have clipped nearly 7% off the shares of such major drug companies as Merck (MRK), Eli Lilly (LLY), and Pfizer (PFE).
Biotech hasn't had to face the same challenges. The industry's pricing is under no threat since biotech treatments are generally tailored for acute cases and typically not constricted by Medicare or HMOs. Moreover, the biotech group is at last delivering some blockbuster treatments. Medications such as Amgens Epogen, a red blood cell stimulant, and Biogen's Avonex treatment for rheumatoid arthritis, to name just two, should help boost industry revenue growth 20% this year, predicts Herman Saftlas, an analyst for Standard & Poor's. "The group started to really take off when a number of companies beat the Streets numbers in the second quarter," says Elise Wang, an analyst with PaineWebber. "You just didnt see that in other sectors of health care."
Count on a full pipeline of biotech drugs to keep the momentum going. The Biotechnology Industry Organization, a trade group based in Washington, D.C., estimates that 350 biotech treatments are currently in human trials, which immediately precede a drug's public release. Meanwhile, a friendly regulatory environment is helping speed approval of 30 to 40 biotech treatments and vaccines a year, says Invesco Health Sciences portfolio manager John R. Schroer. That's helping move a number of potential billion-dollar medications toward commercial release -- from a new asthma treatment by Genentech to an arthritis medicine by Amgen (AMGN).UGLY MICROBE. In short, even better days could be ahead for biotech. The Human Genome Project, a vast undertaking to map the 80,000 human genes, has yet to make much impact on commercial biotech. But analysts expect the results to start showing up over the next decade -- with the potential to reorder the entire pharmaceutical business.
There's just one ugly microbe in this healthy picture: The industry has been so hot of late that share prices have entered uncharted territory. Hambrecht & Quist analyst Richard A. van den Broek says the group is trading at more than 15 times projected 2000 revenues. Historically, the stocks have traded at more like 5 to 10 times projected earnings. Even so, van den Broek says ample rewards still can be had from some of the bigger names in the sector. "If all goes well, you'll see products in this industry benefit from five- to seven-year product cycles," he says. "That means if you get it right, you make money for a long time."
The most widely traded biotech company, Amgen, has gotten a things right for shareholders, with a 62% runup so far in 1999 and 124% in the past 12 months. That puts the companys forward p-e at an oxygen-depleted 44 times earnings, compared with 31% for the S&P 500. CIBC World Markets analyst Matthew Geller says Amgen has earned its premium -- and then some. "They simply have the best pipeline in biotech," he says. "Over the course of the next few months, they're going to make as many significant presentations of promising medical data from trials as a good number of their rivals combined."
Moreover, Geller says, the stock could get a boost from positive reports on an osteoporosis drug and Abarelix, a treatment for prostate cancer, that he expects to be approved this fall. In all, look for Amgen's earnings to grow nearly 20% annually over the next four years, says PaineWebber analyst Wang, who says the stock could reach his target of $100 in the next 12 months, vs. 87 and change at the moment. Amgen is currently rated a strong buy or buy by 24 of the 30 analysts who follow it, according to Zacks Investment Research.THUMBS' UP. For a play on genome research, S&P's Saftlas says Millennium Pharmaceuticals (MLMN) still has appeal, despite soaring 190% year-to-date. Although the company is expected to report only break-even earnings over the next couple of years, Millennium's research has attracted some weighty partners bearing large sums of research and development funds. Currently, $1 billion is set to come from 11 alliances the company has inked. Case in point: Partnership deals this year with Bayer and Becton Dickinson should keep Millennium's labs running at full steam.
The Bayer deal, in fact, calls for nearly $465 million in funding for 225 drug-development projects. Wall Street senses significant upside potential: All seven of the analysts covering the company rate it a strong buy or buy, according to Zacks, and analysts expect the company, once it moves into the black, to increase earnings an average 27% annually over the next five years.
No matter how strong as it has been this year, though, biotech remains a tricky sector, one where you might opt to let a money manager make the tough buy and sell calls. There's one hitch: Most pure-sector mutual-fund plays haven't been around very long. The funds with three years or more under their belt tend to blur the lines between the biotech, pharmaceutical, and health-care sectors.
If such distinctions don't matter much to you, consider the Invesco Health Sciences Fund (FHLSX). Invesco's entry leads all no-load funds ranked by three-year average annual returns, having posted an average annual total return of 20.80% during the period, according to Morningstar. The fund typically has maintained a large weighting in pharmaceutical and medical-device companies, but did list MedImmune, Biogen, and Immunex in its top 20 holdings as of June 30, according to Morningstar's most recent data. Just remember when you're investing in biotech, it's always good to keep some fast-acting pain reliever handy.
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