Marcial: Best Biotechs for 2009

Some familiar big-cap stocks, such as Genentech, as well as a host of promising small caps head the list of biotech prospects

By Gene Marcial

BW's Gene Marcial

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• suggest a story
• digg this
• save to del.icio.us

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.