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Biotech / Medical : VD's Model Portfolio & Discussion Thread -- Ignore unavailable to you. Want to Upgrade?

To: Rocketman who wrote (4903)	5/14/1998 1:04:00 AM
From: JF Quinnelly	Respond to of 9719

Why one analyst sees a healthy future for biotech stocks By Michael Brush moneydaily.com Long neglected by the bull market, biotech stocks should be due for a comeback soon, says at least one brokerage house. While Nasdaq has charged ahead by 75% since the start of 1996, biotech stocks have lagged, gaining only 11% during the same time. They have been left in the dust for a number of reasons. For one thing, many investors still remember how they got burned when the biotech bubble burst in early 1992. They also know biotech stocks can plummet on product disappointments. What's more, the bull has favored big cap stocks -- and biotech names don't fit that bill. But it might pay to start looking over the sector now, because things may start to change soon, says Hambrecht & Quist biotech analyst Richard van den Broek in a recent report. First, he notes, biotech firms -- even the ones that have products and are making money -- are still relatively cheap. That's a quality investors are looking for in this pricey market. The pharmaceutical companies are selling at price earnings multiples of 35 to 55 times forward earnings -- big premiums to their 15% to 25% growth rates. Biotech firms, meanwhile, are selling at p/e ratios below their 30% growth rates. Yes, pharmaceutical companies deserve higher multiples, because they have a broader revenue base. But the difference between the two groups is now unjustifiably large, says van den Broek. Second, most biotech companies have little or no exposure to Asia, where economic problems may actually slow down the U.S. economy at some point. If they do, the non-discretionary spending on medical products made by biotech firms would get hit later rather than sooner. On the other hand, if Asia turns out to be a plus because its slowdown puts downward pressure on U.S. prices, the decline in interest rates that follows would help valuations for many biotech stocks. In valuation models using interest rates to discount future cash flows, companies with expected earnings farther out on the time horizon benefit more from declines in interest rates. Third, the sector will soon start coming out with a lot of new products based on genomics, or the study of the relationships between human genes and diseases, in part because of the increased government and corporate spending in this area. "The commercial impact of genomics will be felt in the diagnostic and drug sectors within the next three to five years," says van den Broek. "And in 10 to 15 years, genomics will have completely revolutionized healthcare." That's still a ways off, but it may not be too soon to start examining the sector. If you are tempted, remember there can be big risks. Only about 10% or 15% of the public companies with products in the development stage will eventually be successful commercially, says van den Broek. To find them is tricky, but he recommends the following basics as a start. * Look for companies with "platform technology," or technology capable of launching several products. "You need more than one chance to win," says van den Broek. "The failure rate is too risky for any one product." * Find financial strength. Look for companies with enough cash to support at least two years worth of expenses. * Identify companies that have a sales and marketing franchise, and not just the technology to come up with products. "The two are distinct assets, and a third-party buyer will find a company more attractive if it already has a presence in the marketplace," says van den Broek. * Don't gamble on product approval. Studies by Hambrecht & Quist have shown it pays to wait till after a product passes through one of the pivotal approval points -- rather than bet on the approval beforehand. Van den Broek says such pivotal points are things like the release of Phase III clinical trail data, approval by a Food and Drug Administration (FDA) advisory panel, or approval by the FDA itself. "You can still catch a good part of the upside, but you avoid the potential downside of a product not making it."