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& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip FINANCE Investing: Europe Annual Reports Bloomberg BW50 SCOREBOARDS Hot Growth Companies: 2008 Mutual Funds Info Tech 100 B-SCHOOLS Undergrad Programs Rankings & Profiles | | SEPTEMBER 4, 2001 INVESTING Q&A Pharma's Outlook: Expect the Pain to Pass Large-cap drugmakers look good for the long term, and in biotech the word is "bullish," say S&P's Herman Saftlas and Frank DiLorenzo
The buys (5-STARS in S&P's Stock Appreciation Ranking System) are all in biotech: Genzyme, Immunex, and IDEC Pharmaceuticals. As a more aggressive choice, DiLorenzo also likes Myriad Genetics, which is among the companies he views as possible takeover candidates. On the next tier down, accumulate, Saftlas lists large-cap pharmas Aventis (a European drugmaker), Bristol-Myers Squibb, Johnson & Johnson, Merck, and Pfizer all as solid long-term choices. He also points to Barr Laboratories as a very successful company in generic drugs. Saftlas and DiLorenzo were both guests in a chat presented Aug. 28 by BusinessWeek Online on America Online. Their comments came in response to questions from the audience and from Jack Dierdorff of BW Online. Edited excerpts from the chat follow. A complete transcript of this chat is available from BW Online on AOL, keyword: BW Talk. Q: The stock market sank again today -- what is S&P's current outlook? DiLorenzo: I think overall, we're bullish. It's impossible to time the bottom on this market -- but we're bullish. On biotech, I'm definitely bullish. Saftlas: I'd say the large-cap pharma sector is likely to tread water over the near term because of the present negatives weighing down on the industry, but the long-term outlook remains bright for big drug stocks. Q: What would you include in a long-term portfolio of stocks from the drug sector? Saftlas: I'll start off by saying my choice stocks in the drug sector are Merck (MRK ), Pfizer (PFE ), Bristol-Myers Squibb (BMY ), Abbott Labs (ABT ), Lilly (LLY ), and Johnson & Johnson (JNJ ). Those companies, I would say, are excellent long-term investments...with strong positions in their markets and with a history of high productivity in terms of new product development. DiLorenzo: In biotech, remember, this is a more volatile market. But the companies I'd look at for the long term are Genzyme (GENZ ), Immunex (IMNX ), and IDEC Pharmaceuticals (IDPH ). They all have established products that are still growing at a good clip -- and they are attractively priced relative to the biotech sector. Q: Backing up for a sec, are the stocks you two just named ranked buy (5-STARS) by S&P? Saftlas: Among the group I gave, there are no 5-STAR-rated drug stocks in big pharma -- no screaming buys. But we have 4-STAR (accumulate) ratings on Abbott, JNJ, Merck -- and I just noticed that we have a 4-STAR rating on Aventis (AVE ), the European drugmaker. DiLorenzo: The three biotech stocks I mentioned are all 5-STARS. That's because I believe they can appreciate well above the market over the next six to 12 months -- with volatility, of course. Q: Is Pfizer the best large-cap pharma stock, or can I make more money in the sector with less risk? Saftlas: Pfizer is one of our strong picks and has been over the years. It made a major merger with Warner-Lambert a year ago, and with the cost savings and efficiencies that would accrue with the merger, it should have the highest growth rate among all companies, and as such it has the highest p-e of the group.... It's a good hold. If it gets into the mid-30s, it would be a buy. Right now it's at $40. Q: How do you rate ATIS (Advanced Tissue Sciences)? DiLorenzo: I don't cover that one. They're a tissue engineering company.... I do cover a competitor called Organogenesis (ORG ). I have a hold on it. I think these companies are interesting, but I also think that the most money to be made in biotech is in human therapeutics, biopharmaceuticals -- rather than these smaller biotech platforms such as tissue repair. Q: What are your thoughts long-term for HGSI (Human Genome Sciences)? DiLorenzo: It's a company I like. I think it's suitable, but only for aggressive investors with a high risk tolerance. I do believe they're the leader in genomics-based medicines.... But the stock isn't cheap.... If you're willing to take on the risk and volatility, it's a stock that can appreciate into next year. Q: Thoughts on GlaxoSmithKline (GSK )? Saftlas: Glaxo is another company that just had a major merger toward the end of last year, with SmithKline Beecham.... Given the merger, they should see some better earnings growth. But the European drug market generally is less profitable. On the other hand, the U.S. is now 50% of the combined company's business, and now that they've combined, they have a strong pipeline and also many good alliances with biotech firms, which should generate some long-term productivity. So right now we have a hold on Glaxo. Q: What about Schering-Plough (SGP )? Do you see it getting back to $60 within 12 months? Saftlas: I don't think so. I think SGP has some major issues it has to address.... First of all, manufacturing problems with the FDA. They've cited poor manufacturing procedures and have held up the approval of new drugs until those problems are remedied. And that's not likely to happen very quickly -- maybe by the end of the year, perhaps. At that point, they'll look to get Clarinex, the advanced form of Claritin, approved. This is very important because Claritin loses its patent next year, and also because the FDA is trying to make Claritin an over-the-counter medicine.... If Schering can get the manufacturing problems cleared up quickly, that might cause some movement in the stock. Also, Schering-Plough is a merger candidate. If it gets bought by somebody, there could be a premium on today's stock price for SGP. Those are the positives. Our rating is a long-term hold on the stock. Q: Do you see a continuing trend for big pharmas to buy into biotech? And if so, what names would be the best bets? Saftlas: Let me say in starting that the major big pharma companies look back now and realize they made a mistake in not moving more aggressively into biotech and biotech alliances. DiLorenzo: I think that targeting who gets bought out is purely speculative. But the focus should be on the small- or mid-cap companies, under $1 billion in market cap. The larger ones are expensive.... And these big biotechs are flush with cash, so they don't need a merger. But I think as far as companies that could get bought out, maybe something like Cephalon (CEPH ), which has a drug approved for narcolepsy -- it's being used off-label for people with sleep and fatigue disorders. I think that's a possibility. I think another stock that looks attractive and cheap is Myriad Genetics (MYGN ). They're involved in proteomics -- predictive medicine.... Maybe a few others are ICOS (ICOS ), ImClone Systems (IMCL ), and Vertex Pharmaceuticals (VRTX ). Q: Any opinion on TEVA (Teva Pharmaceutical Industries)? Saftlas: It's an Israeli-based company moving very aggressively into the global generic industry. They've made a number of acquisitions, NovaPharm being the most recent.... Earnings are estimated at $2 a share this year and $2.40 next year, so they're doing very well. They also have their own product for MS that is gaining strong market share. That's an injectable, and they're working on a pill form of the same drug, which obviously is a great deal more convenient. There is a drawback in that they're Israeli-based -- with all the unrest there. But the business globally is doing very well. Q: The future for Amgen (AMGN )? DiLorenzo: I have an accumulate on it. I like it. I don't love it. It's still a core holding in biotech. It has less downside risk than most others. The main driver is going to be Aranesp [a treatment for anemia in patients with chronic kidney failure], which still hasn't been approved by the FDA -- and that is a delay.... Another main driver is Kineret, which an FDA advisory panel recommended earlier this year for arthritis. It will be minor, not major. Another product will be a sustained duration version of Neupogen. But there have been a few setbacks. One was a drug to treat prostate cancer. The FDA was looking for more data on that, so that project is on hold right now. So this is a rich valuation, but there's a lot going on. Q: As an investor with a long-term outlook, how concerned should I be about the price pressure on drugs? Saftlas: That's a good point. I think we have to look back a bit and realize that the drug industry has been living with pricing pressure for more than seven or eight years. If you remember when Clinton first became President, he accused the industry of gouging the elderly on prices. Since then, with the advent of HMOs, price inflation has come down significantly. But what's more ominous now are the restrictions on the use of expensive drugs by insurance and third-party providers, including Medicare, if there's a big federal drug plan approved. Already, there is a three-tiered system that allows you to pay higher co-pays for drugs that are not in an insurance company's formulary. Q: Do you have an opinion on IDEC Pharmaceuticals (IDPH ) and MedImmune (MEDI )? DiLorenzo: I have a buy on IDEC and an accumulate on MedImmune. Right now, IDEC has probably the fastest-growing biotech drug -- Rituxan for cancer.... IDEC books about 30% of the revenues on that, but it pays no manufacturing costs. Genentech gets the rest of the sales, and it pays for the manufacturing. Also, IDEC has Zevalin, which should be approved soon. It is also a cancer drug, and it would be used on patients who aren't responding to the current best care.... My growth rate for IDEC is about 45% a year for four years on an EPS [earnings per share] basis. For MedImmune, I have a 23% growth rate for the next few years. I think the company has better visibility coming next year with drugs in the clinic. They have several products that look promising for cancer and for urinary-tract infections. And there's still some growth in Synagis -- that's their biggest drug, and it's a treatment for respiratory infections in prematurely born babies for the most part. Q: Barr Laboratories (BRL ) has had quite a runup lately. Is there any upside left for this stock? Saftlas: Barr I have an accumulate on. Barr made headlines recently with their generic Prozac.... They won 180 days of market exclusivity for generic Prozac. After the 180 days, the market is wide open, and anybody can come in with a generic Prozac, assuming the FDA approves it. That's when the price plummets to 80% or more off the original price. We expect generic Prozac to generate over $350 million a year in Barr's fiscal year, which runs from July 1 to June 30 of next year.... They have 21 applications for generics, and they have a total of 60 generics either filed or still in development. So this is a very successful generic company. Q: Can you leave us with a reminder of your top favorite names? Saftlas: My favorites are in the specialty area -- Andrx (ADRX ) and BioVail (BVF ). Andrx is a generic drug company. BioVail specializes in the controlled release of drugs in the body. Both are growing fast. DiLorenzo: I really do like IDEC, which I mentioned. I like Immunex (IMNX ), which is attractive relative to its peers. Genzyme, I also like that -- good balance of approved products in diagnostics and also a nice pipeline. And for a more aggressive choice, I like Myriad Genetics. I think they'll be a major player in proteomics. Watch out for them. Edited by Jack Dierdorff Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. 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