A Happy Pill for Some Biotechs


By Amy Tsao The biotech sector in 2003 was blessed with news that ranged from bulging new-drug pipelines to positive investor sentiment. That gave biotech stocks a fabulous year: The American Stock Exchange Biotech index of 17 stocks will finish about 40% higher for the year. Shares in Genentech (DNA) alone have risen 175%, to $91, or 60 times analysts' consensus expectation for net earnings per share next year.

Many analysts are predicting that 2004 will be another flush year for biotech shares, with many potential Food & Drug Administration (FDA) approvals on the docket, including long-awaited cancer drugs Avastin from Genentech and ImClone's (IMCL) Erbitux (see BW Online, 12/29/03, "Biotech: A Coming Boom -- or Bust?"). With many biotech stocks' valuations not yet out of sight, analysts are still gung ho for some big names. Kris Jenner, manager of the T. Rowe Price Health Sciences Fund, expects the shares of both Amgen (AMGN) and Gilead (GILD) to rise 20% in 2004.

TOO PRICEY? Indeed, the one wrinkle in 2004 may be that "the composition [of the strongest stocks] will be different," says Sam Isaly, managing partner of OrbiMed Advisors, a pharmaceutical and biotech asset manager in New York City. Whereas the 2003 advance was led by smaller-cap names, the best-performing biotech stocks in 2004 will generally be those of bigger-cap companies, Isaly predicts.

Genentech remains a favorite of the investing crowd. Even so, getting into the stock now could be risky. Genentech hopes to introduce four new drugs in 2004 and 2005, yet Wall Street is split on whether it's a buy at its current lofty price. "It's a winner, but we're not adding now," says Isaly. He recommends taking a closer look if the stock retreats to around $75.

An outfit like Amgen, which has had its share of problems lately, could show more appreciation next year. True, its recent earnings guidance for 2004 was somewhat disappointing, predicting a range of $2.30 to $2.40 per share while analysts had been expecting $2.39 on average. And President Bush's new Medicare rules may dissuade physicians from prescribing its top-selling drugs for boosting red blood cells, Aranesp and Epogen. Furthermore, Swiss drugmaker Roche is developing its own competing red-blood-cell booster.

"DISPROPORTIONATE" CONCERN. Yet many analysts think that Amgen -- the biotech with the biggest revenue -- will do just fine. "Its business fundamentals are strong, yet the concern you hear about its future is so disproportionate," Jenner says. For instance, the cuts in Medicare reimbursement rates won't take effect until after next year, meaning that Aranesp, particularly, will remain a highly profitable drug for doctors to prescribe.

Moreover, Roche's competing product won't likely be sold in the U.S. for some time, as the FDA continues to wrestle with how, and if, to allow the sale of generic equivalents of biotech drugs. Thus, Eric Shen, analyst at the Pimco RCM Biotechnology Fund in San Francisco, expects Amgen to outperform its 2004 guidance. He argues that if Amgen reports some promising phase II results at its R&D meeting in March, investors may embrace the stock.

Amgen is trading at $61 and change, or about 25 times next year's net earnings expectation of $2.39 per share. That makes it the cheapest of the big biotechs and a potential steal compared with Genentech. Despite the challenges it faces, Amgen still expects its earnings to grow by more than 20% next year. "We hypothesize that it suffers from Pfizer (PFE) syndrome," says OrbiMed's Isaly. "It's so big that it's hard to find enough buyers to keep [the stock] moving, even though the business is doing very well."

FLU-VACCINE SPOTLIGHT. Another big biotech that has experienced turmoil of late is Gilead Sciences, the maker of flu treatment Tamiflu and the anti-HIV drug Viread. It missed its earnings target in the third quarter as customers cut back on purchases of Viread to work off inventories. Still, Gilead is "in a good position to beat estimates in the next quarter or two," Shen predicts.

The stock is a bit pricey, trading at $58 and change, or about 37 times projected 2004 earnings per share. But earnings growth should reaccelerate to 30% annually by 2005, says T. Rowe Price's Jenner, who's banking on the idea that Gilead will win FDA approval of a stronger, once-a-day HIV medicine by then.

One stock that may finally be cheap enough to consider is Medimmune (MEDI), maker of an inhaled flu vaccine. Its earnings are expected to jump by 25% in 2004, yet it's now trading around $25, with a forward p-e ratio of 26. Shen says: "I think it has been oversold."

EMERGING WINNERS? Medimmune's FluMist, approved in 2003, wasn't widely adopted at first. But this year's highly publicized flu-vaccine shortage should provide some residual benefits for Medimmune, both in dollars and awareness. "Demand [for its flu vaccine] has picked up some," says Shen, who adds that its sales of Synagis, a treatment for respiratory disease in children, remain strong.

Some emerging biotech names could also do well in 2004. Shen likes Adolor (ADLR), which is developing a drug with GlaxoSmithKline (GSK) to treat post-operative impacted bowel -- "a very attractive drug," he says. Adolor has finished two post-phase-III trials to date and will report results of a third trial early in 2004. Glaxo has also indicated that it may want to test the drug for treating a more common condition, irritable bowel syndrome. At nearly $20 per share and a market cap of $628 million, Adolor is "arguably cheap," Shen says.

Ron Garren, chief biotech strategist at investment firm InvestBio in New York and editor of newsletter Biotech Insight, likes prospects for MGI Pharma (MOGN). The stock is already trading near its 52-week high of $39 after recent FDA approval for its drug to reduce nausea and vomiting caused by cancer chemotherapy. Garren expects the new drug to take market share from existing treatments -- "it's clearly a better drug because it lasts longer," he says.

The wild biotech ride isn't guaranteed to continue at 2003's frenzied pace. But some beat-up names among biotech blue chips, plus a handful of up-and-comers, may do well, whatever the group's fate. Tsao covers biotechnology issues. Follow her The Biotech Beat column, only on BusinessWeek Online


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