From Briefing, a gloomy view. Aplogize for the loss of formatting in the table. The chart didn't reproduce at all.
After falling by 25% in a three week period (5/24-6/12), the Biotech Index (BTK 375.36) has rebounded by nearly 15% over the past few days. While some investors are viewing the bounce as an indication that the biotech sector has finally put in a bottom (after dropping as much as 44% from the start of the year), Briefing.com contends that the recovery rally amounts to nothing more than a typical correction from deeply oversold territory. Unfortunately, the major problem confronting the biotech sector is valuation, and as we see it there are two ways in which that issue can be resolved to the market's satisfaction: 1) a huge spike in sales or 2) much lower prices. Given that there's no reason to expect the former, we continue to fear the latter.
Put another way, the biotech sector is now going through the same gut-wrenching valuation adjustment and weeding out process that hammered the Internet industry a couple years ago. And as many of you probably know from personal experience, buying the dips during the Net meltdown proved to be a very costly strategy. We're afraid the same will be true in biotechs, as too many of the sector leaders continue to sport excessive price/sales ratios.
The best way to make our point is through illustration. The table below lists 12 biotech stocks with market caps over $500 mln and p/s ratios (based on trailing twelve month sales) of greater than 10-to-1. We've also listed projected earnings for FY02.
Stock Price 52-Wk Hi/Lo Market Cap P/S TTM Est. Earnings Cash per Share **
Human Genome Sciences (HGSI) 14.62 66.90/12.65 $1.9 bln 226.5x ($1.44) $11.39
Gilead Sciences (GILD) 36.19 39/22.85 $7.0 bln 27.2x $0.06 $2.90
IDEC Pharm (IDPH) 37.43 74.91/30.75 $5.7 bln 18.7x $0.79 $3.15
Abgenix (ABGX) 11.38 45.50/9.72 $990.9 mln 14.8x ($1.59) $7.60
Medarex (MEDX) 8.20 29.09/7.39 $598.6 mln 13.8x ($0.68) $5.87
Millennium Pharm (MLNM) 12.54 36.60/10.33 $3.5 bln 13.3x ($0.73) $7.05
ICOS Corp. (ICOS) 20.30 65.40/17.05 $1.2 bln 12.5x ($2.25) $5.71
Immunex (IMNX)* 23.42 31.45/13.85 $12.8 bln 12.3x $0.25 $0.93
Ligand Pharm (LGND) 14.14 20.50/7.30 $1.0 bln 12.0x ($0.04) $0.56
Protein Design Labs (PDLI) 10.15 44.30/8.57 $897.4 mln 12.0x ($0.19) $7.19
Amgen (AMGN)* 43.86 69.01/36.73 $45.4 bln 10.9x $1.40 $4.98
Medimmune (MEDI) 30.03 48.95/26.65 $10.7 bln 10.7x $0.65 $2.93
*Immunex being acquired by Amgen. ** Data provided by Market Guide.
With the risk tolerance of investors having declined considerably over the past three years, Briefing.com maintains that the biotech sector's valuations are simply too high to be supported - especially given the lack of earnings visibility over the next two to three years. While valuations are the biggest obstacle to a sustained rally, sector must also try to overcome a less accommodating FDA, several high-profile clinical setbacks, heightened competition, the Bristol-Myers Squibb/Imclone debacle, a slowdown in the cash infusion from big pharma, the lack of a hot story (such as mapping of human genome) and a major technical breakdown.
As for the group's technical tone, the chart below lends support to Briefing.com's view that the current advance is little more than a corrective bounce. In order for the intermediate- to long-term technical picture to brighten, we would need to see a break of the 50-day moving average (413.20) followed by a move through the 200-day moving average (497.38). To achieve that relatively modest objective, however, the Biotech Index must extend its advance by another 122 points, or 33%... All that just to get back to its 200-day moving average.
Considering the ongoing concerns over valuations, clinical setbacks, reduced cash inflows, etc., not to mention considerable overhead/trendline resistance, Briefing.com thinks it is way too soon to engage in broad-based bargain hunting in the battered biotech sector.
Robert Walberg |
