Interesting article in today's WSJ. I guess I agree with Lind that the companies with emerging sales may be a sweet spot - I certainly own a number of them.
TALES OF THE TAPE: More Biotech Cos. Seen Joining Top Tier
By Melanie Trottman
NEW YORK (Dow Jones)--In the biotechnology industry, the big guys get all the attention.
But soon that could change.
This maturing industry should provide new options for hungry investors looking to benefit from the next wave of profitable companies.
Currently the sector's elite consists of fewer than 10 large-cap companies with steady earnings growth and market capitalizations well above $1 billion. Amgen Inc. (AMGN) and Biogen Inc. (BGEN) are among the privileged few.
Wall Street rewarded those companies in 1998 as profits rose on product sales growth. The gains helped SG Cowen & Co.'s Biotech Index add nearly 40% for the year, an increase driven by the large-cap companies.
Just below the top tier are a handful of promising companies that recently launched products with tremendous growth prospects but haven't had consecutive quarters of earnings growth - a prerequisite for many investors. Still, market capitalizations at a few of these companies, including Immunex Corp. (IMNX) and MedImmune Inc. (MEDI), have already reached the top-tier level. Analysts expect some that have flirted with quarterly profitability to stay there in the coming year.
Then there's the third group, which includes at least a dozen companies expected to join the ranks of the profitable over the next two years either from sales of currently marketed products or new ones.
Earnings expectations vary considerably, but analysts say these are the companies investors should consider.
"The real investment sweet spot is as companies go from product development stories into the product revenue category," said Morgan Stanley Dean Witter analyst Douglas Lind.
Several Companies Seen Profitable In Next 2 Years
Companies expected to graduate to profitability over the next two years include Gilead Sciences Inc. (GILD), Aviron (AVIR), Gliatech Inc. (GLIA), Transkaryotic Therapies Inc. (TKTX) and GelTex Pharmaceuticals Inc. (GELX). But when they will move into the black, analysts said, depends largely on the timing of new product filings - which can be hard to predict - and FDA approvals.
"Wall Street doesn't reward companies for good clinical data," said Larry Feinberg, a partner with hedge-fund Oracle Partners. "They only reward companies for sales and earnings."
The stock gains of 1998 followed a bear market in biotech that changed the way hedge-fund managers invest. Gone are the days when major fund managers poured money into companies with early-stage programs and rode out the potential failures or successes.
"Hedge-fund investors are very impatient right now," said Feinberg. With the maturation of the industry, "we don't need to make a bet that a company is going to do well in a clinical study." he said, adding that many companies have already passed the "scientific-risk" stage.
Analyst Bill Slattery of money-management firm Amerindo Investment Advisors said he also evaluates the quality of management, the size of the product target market, the access to development funding and the terms of any marketing partnerships.
Some analysts were most bullish on Gilead Sciences, whose pipeline includes GS 4104, a flu treatment developed with Roche Holding AG, and Preveon, an anti-HIV compound.
The drugs, expected to be filed with the FDA this quarter, could hit sales of several hundred million dollars, said Merrill Lynch & Co. analyst Eric Hecht. They could also yield full-year profits for Gilead in 2001, with earnings estimated at $1.82 a share by First Call Corp. Hambrecht & Quist analyst Richard van den Broek said the company could post a year of profits sooner, in 2000.
The stock, which currently trades around 43, could top 60 within 12 months, analysts said.
Another flu product should catapult Aviron into the black for its first full year in 2000, to earnings of 40 cents to 60 cents a share, some said. Morgan Stanley's Lind expects the intranasal vaccine FluMist to get FDA approval by mid 2000, giving the company enough time to launch the product for next year's flu season. Some analysts see sales of the product at $500 million.
The stock, Lind expects, will double to 40 within 12 months.
Transkaryotic Therapies, which is developing methods of producing therapeutic proteins for long-term treatment of hemophilia and other diseases, should post a full profitable year in 2001, earning 45 cents a share, SG Cowen & Co. analyst Eric Schmidt estimated. First Call's 2001 consensus estimate, however, is break-even.
Gliatech Seen In Black This Year
Among companies with products already on the market is Gliatech, which should have its first profitable year in 1999, earning 9 cents a share, First Call estimates. The company was profitable in the fourth quarter but posted a loss for all of 1998.
Gliatech's ADCON-L, launched in the U.S. last June and also marketed in Europe, is a gel to reduce scarring and pain in spine surgery patients. As product sales grow, they could reach $200 million, driving the stock to 34 from about 22 within 12 months, SG Cowen expects. The company is testing other products.
GelTex also has a product on the market and another in late-stage development. Renagel, approved in the U.S. in November and marketed with Genzyme General Corp. (GENZ), is a polymer-based agent that soaks up phosphorus in kidney-dialysis patients. The company is developing CholestaGel for cholesterol lowering and should launch it in second half 2000. Analysts surveyed by First Call expect GelTex post a full year of profits in 2000, at 17 cents. SG Cowen estimates 40 cents and has a 12-month price target of 55, nearly four times the current price of about 15.
With three marketed products, Protein Design Labs Inc. (PDLI) has flirted with quarterly profits but should post a full year of earnings in 2000, said CIBC Oppenheimer Corp. analyst Matt Geller, whose 12-month price target is 50, compared with a current trading price of about 15. First Call sees earnings of 15 cents in 2000.
Other companies analysts say are set to turn profitable over the next two years include U.S. Bioscience Inc. (UBS) and Coulter Pharmaceutical Inc. (CLTR).
SG Cowen's Schmidt expects U.S. Bioscience, an oncology company, to post profits of 27 cents a share in 2000 as sales of three marketed products expand. He sees the stock rising to 22 within 12 months from around 12 now.
Lehman Brothers Inc. analyst Eric Ende expects Coulter to post a full year of profits in 2001 as Bexxar, a compound for non-Hodgkins lymphoma, nears marketing. The product could be approved by year-end and launch as early as December, Ende said. He expects worldwide sales of about $135 million next year and sees the stock doubling to 40 within 12 months.
But just reaching profitability doesn't necessarily make for a good investment. Staying there is more important.
"You need to continue to grow products currently on the market, grow your pipeline and keep investors thinking that you will be able to deliver sustained earnings growth," Ende said.
Michael Yellen, portfolio manager of AIM Global Health Care Fund, said that while his fund only invests in biotech companies that have become profitable, he realizes an earlier investment could mean paying less for the stock.
"Obviously, you're going to miss a lot of the upside," by investing later, he said. But since sales forecasts often go unmet, he noted, the better approach is to wait and see.
His fund has holdings in two of the big boys - Amgen and Biogen.
- Melanie Trottman; 201-938-5287
|
