Barron's: Big-cap biotechs overvalued
By Deborah Adamson, CBS.MarketWatch.com
Last Update: 2:14 PM ET April 27, 2002
NEW YORK (CBS.MW) -- Large-cap biotechs may be set for a fall since they're still too expensive even after a slump in their stocks, according to a Barron's article Saturday.
The Amex Biotech Index has plunged by almost half of its value since its peak in 2000, but it still has rallied by 226 percent over the last five years.
Barron's took issue with the biggest members of the sector, saying that the top eight are trading at an average of 50 times 2002 earnings -- twice their expected average long-term growth rate of 25 percent and more than double the S&P 500's multiple.
Large biotechs also don't show "really strong fundamentals," good visibility and upside revisions to warrant their premium, said Mike Yellen, manager of the AIM Global Health Care Fund, whom Barron's quoted.
Also, some of these companies have been hit with bad news.
The Food and Drug Administration wouldn't review ImClone Systems' application for its cancer drug, Erbitux.
Genentech and Xoma said they would delay their application for psoriasis treatment, Xanelim.
Biogen's multiple-sclerosis treatment, Avonex, could lose market share to a competing drug by Serono, Rebif. Avonex contributes about 90 percent of Biogen's revenue.
Genzyme has been struggling with inventory backlog of Renagel, its kidney dialysis drug.
Even strong companies could be vulnerable, such as Idec Pharmaceuticals and Amgen.
Penetration of Idec's Rituxan drug, which is used in the treatment of non-Hodgkin's lymphoma, seems to be peaking in some key markets. Growth could drop as low as 15 percent in 2004. Last year, sales grew by 84 percent.
Thus, Idec's earnings growth could shrivel to 16 percent in 2004, compared with 44 percent this year.
Idec trades at 64 times its 2002 earnings.
As for Amgen, sales of its second-generation drug Aranesp is starting slowly but business could pick up if it's approved for use in oncology. Total product sales should increase in the 20 percent range this year, up from a prior forecast of growth in the high teens.
But Amgen faces a big risk in its purchase of rival Immunex for $16 billion.
Barron's said some analysts estimate that Immunex's rheumatoid arthritis drug Enbrel would have to generate at least $2.5 billion in yearly sales to make the acquisition pay off for Amgen. Last year's Enbrel sales were $762 million.
However, Enbrel could face competition from Abbott Labs' D2E7 drug, among others.
Amgen trades at 39 times 2002 earnings. Some analysts speculate that the stock will eventually trade more like big drug stocks -- Amgen and Immunex would have a $74 billion market cap -- which sell for an average 22 times this year's earnings.
Deborah Adamson is a reporter for CBS.MarketWatch.com in Los Angeles.
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