After Biotech Selloff, Pros Focus on Proven Products
BY EVELYN ELLISON TWITCHELL
Bloated from a surge of securities offerings, the biotech market has done an abrupt U-turn
in the past two weeks.
The AMEX Biotech Index has plunged 34% since March 6,
following a 103% gain since the end of last year. Money flow into
biotech and health care funds has also taken a break: After adding to
these funds for 10 straight weeks, investors withdrew about $572 million between March
9 and 15, according to AMG Data Services.
The problems: a glut of paper in the form of initial and secondary stock offerings, as well
as bond issues. And comments by President Clinton and British Prime Minister Tony
Blair that some investors viewed as ominous for the value of patents on genes.
So, does the selloff mark the end of the biotech boom, or is it just a healthy breather?
Wall Street pros tell Barron's Online that strong growth in the sector should continue to
propel stocks for the next few years -- albeit at a more tempered pace than that of recent
months.
The fundamental outlook hasn't changed, they maintain. In the past five years, the
industry has obtained more than 80 approvals for drugs, vaccines and new uses of existing
medicines. That's more than twice the total in the previous 13 years, according to the
Biotechnology Industry Organization. And 350 products are in clinical trials.
This time last year, health care fund managers were upping their portfolios' biotechnology
weightings. But over the past month, Norman Fidel, manager of the Alliance Health Care
Fund, says he trimmed biotech from 20% to 12% of his holdings. And Jordan Schreiber,
manager of the Merrill Lynch Healthcare Fund, says he's become more cautious on the
sector as well. "I think we'll see more of these selloffs," Schreiber warns.
At a minimum, investors probably will be more selective going forward, focusing on
larger companies with established products and sales.
"Whenever you get a correction, what you see is people will gravitate toward the higher
quality names," says Linda Miller, manager of the John Hancock Global Health Sciences
Fund. Although her fund, too, has recently moderated its position in biotech "a little bit,"
it did add last week to its holdings among the bigger-cap names.
Given the likelihood of a more volatile environment, three buy-side professionals say they
favor the prospects of Genentech -- even though its shares are still exorbitantly priced.
At 178 late Monday afternoon, the stock trades at about 158 times First Call's projected
consensus 2000 earnings per share of $1.13. That's a monstrous 6.3 times its projected
long-term growth rate of 25% -- the highest P/E-G ratio among the large-cap biotech
stocks. [See table, below.]
Stock
Price
3/20/00
Consensus
2000
Earnings
Estimate
Price to
2000 EPS
Estimate(x)
5-year Est.
annual EPS
growth(%)
PEG
Ratio
(P/E:
Growth)
Genentech
178
1.13
157.5
25
6.30
Immunex
153 1/8
0.79
193.8
50
3.88
Amgen
58 1/16
1.08
53.8
16
3.36
IDEC
108 1/4
0.96
112.8
45
2.51
Chiron
41 3/8
0.78
53.0
25
2.12
Biogen
79 7/8
1.8
44.38
25
1.78
MedImmune
162
13/16
1.9
85.7
52
1.65
Source: First Call
Still, the San Francisco-based outfit has "the best product pipeline of any company in the
space," according to Toni Shimura, manager of the MFS Managed Sectors Fund. With a
market capitalization around $50 billion, it generated about $1.4 billion in sales last year
from several products, including Herceptin, a breast cancer drug, and Rituxan, a treatment
for non-Hodgkin's lymphoma.
And the shares are 27% off their high of 245, set earlier this month.
A lower-priced alternative: IDEC Pharmaceuticals. The San Diego-based company, which
has a market capitalization of about $5 billion, co-markets Rituxan with Genentech.
Rituxan sales have been on the rise, and some analysts expect them to grow 50% this year.
IDEC also expects to file in the fourth quarter for approval of a related drug, Zevalin.
Some investors have been skittish since competitor
Coulter Pharmaceuticals announced it won a patent for
a drug that would compete with Zevalin. But Dr. Eric
Ende, an analyst at Lehman Brothers, says IDEC has
been working on research related to Zevalin since the
early 1980s -- long before Coulter filed its patent in
1993.
"The IDEC management team is expressing a lot of
confidence that this won't be a problem," adds Andy
Summers, an analyst at Invesco Funds Group, who says
his fund added to its IDEC holdings last week.
At 108 1/4 late Monday afternoon, IDEC was changing hands at about 113 times First
Call's projected consensus 2000 earnings per share of 96 cents. But with an enviable 45%
projected long-term growth rate, IDEC's P/E-G ratio is 2.51 -- still lofty, but below
average for its peer group. And the shares are about 37% off their 52-week high, set
March 6.
Biogen, too, looks relatively cheap. The shares have been lagging since the company
announced that, despite positive results in a phase II study, it would not proceed with
development of the congestive heart failure treatment, Adentri, and instead would pursue
a second-generation version of the drug.
Some analysts also are concerned that sales growth of its main product, the multiple
sclerosis treatment Avonex, may be flattening. And the company is in a patent dispute with
Berlex Laboratories over the same drug.
But bulls on the shares believe Avonex sales may be reflecting a seasonal slowdown (which
they saw last year) and Y2K stocking by patients. They expect the sales to jump in the
second quarter. Plus, they say, the patent dispute could drag on for months or years. And
Biogen probably will boost its pipeline by licensing at least two drug candidates before the
end of the year.
At 79 7/8 late Monday afternoon, the stock was trading
at about 44 times First Call's projected 2000 earnings
per share of $1.80. That's less than twice its forecasted
long-term growth rate of 25% -- the second lowest
P-E/G in the group.
Kurt von Emster, lead manager of Franklin
Biotechnology Discovery Fund, slashed his position in
Biogen last month over some of those concerns. But
when the stock fell last week to 81, he bought back in.
"It's a good opportunity to own a high-quality company
at a reasonable price," he says.
Granted, even after their sharp decline, many of the larger-cap biotech stocks look
expensive -- with P/E multiples more than twice their long-term growth rates, in most
cases.
But, unlike many of their smaller peers, these companies do have approved drugs and
even profits. And as the fundamental outlook continues to improve for the biotech sector,
these leaders may be the most likely to grow into their valuations. |
