Jubak: Back to Biotech

09/24/2004 12:00 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

"I have haven’t owned a biotech stocks since June 2003, but now is the time to look at developing a biotech portfolio," says Jim Jubak, editor of Jubak’s Journal. Here, he looks at a mix of already-profitable stocks and development stage plays.

"If you’re looking to build a portfolio from the seasonal biotech sector, now’s the time to do it. We’re entering the strongest period of the year for biotech stocks. In most years, biotechs decline in the spring as investors anticipate a summer hiatus in the conferences where new clinical results are announced. They rally in the fall as the conference schedule and the volume of news increases. Investing in biotech now fulfills one of my basic investing tenets, namely buy when the playing field is biased in my favor (and avoid it when it isn’t). Second, the sector pulled back from its April high and has since moved up enough to give me confidence that this year has a strong chance of following the seasonal pattern. And third, big retreats in the prices of some of the sector’s leaders make it easier to put together a biotechnology portfolio that balances risk and reward.

"I’m advocating a strategy that builds a two-part portfolio with the first group made up of profitable, established biotechs and the second part composed of pipeline-rich, but unprofitable companies. Investors are more risk-averse and more likely to want to see results before buying, rather than paying up for potential. That favors the profitable and more established companies. Also, these well established biotechs have retreated from annual highs, which makes them more reasonably priced than they’ve been in a while, and they are likely to lead any recovery in the sector. Second, pipelines still pay. The stocks of companies that make the transition from owners of promising drug candidates to owners of promising drugs with FDA approval are likely to show the biggest pop over the next 12 to 18 months if the stock market recovers from its summer doldrums. Remember, biotechnology stocks, even the big name equities, aren’t stocks to fall in love with. They’re highly volatile and subject to huge seasonal moves. Buy low and sell high is definitely the strategy here. And this season is the time to think about putting it to work. Now here’s my seven-stock, two-part biotechnology portfolio for the seasonal rallies.

Profitable Leaders

"In our first group, we have three big cap and profitable biotech leaders. Amgen(AMGN NASDAQ) is down from its early February 2004 peak near $66, but the stock has been rebounding lately. Based on the strength of Amgen’s product lineup, I predict compounded annual earnings growth of about 20% through 2005. Using that forecast as well as projected earnings per share of $2.85, Amgen is currently selling for a price-to-earnings/growth rate (PEG) ratio of just about 1 historically cheap for Amgen or any stock with this kind of potential growth. The stock is as cheap as it is for a couple of reasons: investors fear growth could be trimmed by reduced reimbursement benefits, and while Amgen’s pipeline of new drugs looks strong in the short and long term, the middle term is worrisome.

"Chiron  (CHIR NASDAQ) is currently trading at just 21 times projected 2005 earnings, but valuation is not the likely catalyst for this stock. Instead, look to the upcoming fall and winter flu season to put a spotlight on this leader in the flu vaccine segment. Genentech (DNA NYSE) wants to be the world leader in cancer drugs. The company’s stock dropped from a peak above $60 in April to $45 at the end of July. In August, the stock reversed course and appears to be building a base for the rest of the year. Tarceva, a promising lung-cancer drug from Genentech and its partner OSI Pharmaceuticals (OSIP NASDAQ), is likely to receive FDA approval in late 2004 or early 2005. (Editor's Note: Following Jim Jubak's report, DNA and OSIP both rose sharply on positive news regarding Tarceva.)

Pipeline Potential

"In our second group, we offer four companies with no profits but potentially huge pipelines. Cell Genesys (CEGE NASDAQ) is a highly speculative pick. It has a pipeline full of gene-therapy drug candidates for Alzheimer’s, Parkinson’s, and Lou Gehrig’s diseases, but the nearer-term payoff comes from the company’s GVAX line of cancer drug candidates. I look for the first drug, for prostate cancer, to hit the market in 2008, with drugs for lung and pancreatic cancer to follow by 2011.

"Incyte (INCY NASDAQ) shares have been clobbered after the company took about $50 million in restructuring charges to shut down its Palo Alto facilities. But the company ended its June quarter with about $470 million in cash. That’s an important number since it puts an effective floor under the stock near current levels (the company’s market capitalization is closer to $500 million). The company is just now moving to clinical trials with its first significant drugs. Its HIV drug has advanced the furthest so far and is in Phase 2 trials.

"NPS Pharmaceuticals (NPSP NASDAQ) is showing signs of life with shares having nudged off the 52-week low of $16.48, about half the 52-week high of $36.61. The timing is just about right since the company is likely to release a bushel of news in the fall. Sensipar (or Mimpara, as it is known in Europe) for treatment of secondary hyperparathyroidism is likely to get approved in Europe in the fourth quarter of 2004. NPS Pharmaceuticals will present new data on Preos, the company’s osteoporosis drug, in an effort to widen the market for the drug in October. And the company is expected to see proof-of-concept results for its new migraine drug by the end of 2004.

"Onyx Pharmaceuticals (ONXX NASDAQ) is valued at $1.3 billion by the stock market, way above its $240 million in cash and cash equivalents and an indication that Onyx Pharmaceuticals is well along the path that Incyte is just beginning. The company’s drug for advanced renal cell cancer is now in Phase 3 trials and the company is talking with the U.S. Food & Drug Administration about filing for approval based on complete Phase 2 trials. In addition, the company is about to start new trials for its drug for malignant melanoma in early 2005."

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