Biotechnology stocks haven't been darlings of Wall Street for quite some time—with the exception of giants Genentech (DNA) and Amgen (AMGN). In 2008 those companies pulled something of a surprise: They did relatively well during the market meltdown, beating the Dow Jones industrial average and Standard & Poor's 500-stock index.
That has given a badly needed boost to the biotech bulls, who continue to believe the group has great potential for gigantic returns. There weren't many big winners in 2008, however: The Nasdaq Biotech Index (NBI), avidly tracked by biotech followers, was down 12% and the American Stock Exchange Biotech Index (BTK) slumped 17%. Still, that beat the Dow, which tumbled 33.84%, and the S&P, which sank 38.5%.
That's no guarantee, of course, that biotechs will outperform the market in the new year. But the chances are looking better that they might do that, even though some biotech analysts expect 2009 will be another difficult year.
"Biotech stock performance in 2009 will likely remain challenging," says Mark Monane, biotech analyst at investment firm Needham. He expects the economic crisis and a tough regulatory environment for the industry to spill over into the new year.
Biotech's Bright Stars
The biggest biotech winner in 2008 was Idenix Pharmaceuticals (IDIX), whose stock jumped 114.4% in 2008, to 5.79. It has since continued to rise, to 6 on Jan. 9. Idenix develops drugs for the treatment of human viral and other infectious diseases, mainly directed at the hepatitis B and C viruses.
The No. 2 biotech gainer was Micromet (MITI), which was up 111.7%, to 4.36. It has since eased to 4.03 on Jan. 9. The company develops novel antibody-based drugs for the treatment of cancer, inflammation, and autoimmune diseases.
The No. 3 gainer, Sequenom (SQNM), advanced 107.7%, to 19.84. The stock has continued to move up since the end of 2008, to 23.40 on Jan. 9, 2009. Sequenom provides genetic analysis tools used in biomedical, molecular medical, agricultural, and noninvasive prenatal diagnostics research.
Sticking With Small Caps
So what is the next batch of biotechs that analysts believe will lead the parade in 2009?
Since the broader stock market continues to reel from the drubbing it got in 2008, there is a tendency among analysts to favor big-cap biotech stocks that boast positive cash flow. Still, most analysts continue to favor the small fry, particularly those that see "pivotal events" sometime this year that could pull them up to high levels.
"Some of the smaller-cap stocks we like have the potential of attracting licensing pacts with Big Pharma, or may end up as takeover targets by larger companies," says Monane. He sees consolidation picking up this year in the biotech sector.
Monane points out that four areas account for more than 80% of the almost $300 billion spent on biopharmaceuticals in the U.S.: cancer, cardiovascular, central nervous system, and infectious/inflammatory diseases.
Among the biotech stocks Monane recommends are Allos Therapeutics (ALTH) in the field of oncology/hematology diseases; Cytokinetics (CYTK) in cardiovascular; Arena Pharmaceuticals (ARNA) in central nervous system/metabolics; and Gilead (GILD) in infectious diseases, mainly HIV.
Needham has done business with the biotech companies it recommends for 2009.
Top Pick: Genentech
The stock of Allos, which focuses on developing small-molecule therapeutics for cancer treatment, has climbed from 3.82 on Oct. 10, 2008, to 6.47 on Jan. 9. Monane believes Allos has opportunities to enter into partnerships with Big Pharma on some of its products. His 12-month target for the stock is 12.
Cytokinetics (CYTK), which is developing small-molecule therapeutics for cardiovascular disease, has risen from 1.66 a share on Nov. 21, 2008, to 2.68 on Jan. 9. Monane has a 12-month price target of 11.
Arena, which has developed a screening assay using its proprietary technology, is also on the rise, from 2.70 a share on Oct. 24, 2008, to 3.78 on Jan. 9. Monane expects the stock to hit 14 in 12 months.
And Gilead, a big-cap biotech that develops drugs to advance the care of people suffering from life-threatening diseases, has climbed from 35.60 a share on Oct. 10, 2008, to 48.23 on Jan. 8. Monane's price target: 51.
Another avid biotech follower is John McCamant, editor of the Medical Technology Stock newsletter in Berkeley, Calif. Genentech, the world's largest biotech company in market cap, is his top pick for this year.
The Obama Factor
Genetech's No. 1 product, Avastin, approved by the Food & Drug Administration in 2004 for first-line treatment of metastatic colorectal cancer, is a blockbuster, with sales of $3.2 billion in 2007. Analysts expect Avastin sales increased by 18% in 2008. The stock is one of the big winners in the industry, zipping up from 66.50 a share on Jan. 23, 2008, to 86.25 on Jan. 9, 2009. Roche, which owns 55% of Genentech, offered to acquire the shares it doesn't yet own at 89 a share. Genentech rejected the bid as too low.
McCamant believes Roche will up the ante and raise its bid to the 95-100 range. He figures that with the global recession, Genentech is likely to welcome such an offer—sooner rather than later.
McCamant's second pick is Elan Cop. (ELN), one of the worst biotech performers in 2008. Its stock has crashed from 37.45 on July 10, 2008, to 8.37 on Jan. 9. At its depressed price, all the potential bad news appears to be already reflected in the stock, he says. One underappreciated asset of Elan, says McCamant, is the Alzheimer's drug it is developing in collaboration with Wyeth (WYE). McCamant owns Elan shares.
His third pick: Immunogen (IMGN), which is developing antibody-based therapeutics for cancer. Its proprietary technology enables the production of antibodies with the capacity to deliver cell-killing agents directly to the tumor. Immunogen's stock has been on the rise as well, pushing up from 2.47 a share on Oct. 10, 2008, to 4.49 on Jan. 9. McCamant also owns Immunogen stock.
The "Obama factor" will likely benefit the biotechs, argue some analysts. Once sworn into office, President-elect Barack Obama is expected to focus more attention on health care, including support for biotechs, and foster innovation and increased prescription drug coverage. The added attention may be just one more catalyst for a good year for the biotech group.
Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.