Two Biotechs That Look Good Now

02/26/2009 12:00 pm EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue, editor of Personal Finance, and Benjamin Shepherd, say health care and biotechnology stocks should outpace the markets, and they name two potential winners.

Pfizer’s (NYSE: PFE) $68-billion deal to buy rival pharmaceutical giant Wyeth (NYSE: WYE) is the largest acquisition in the pharmaceutical industry in nearly a decade.

The likelihood of increased merger and acquisition (M&A) activity is only one reason to favor the health care industry. Despite the ongoing credit crunch and the weakest economic environment since at least the early 1980s, earnings growth for the Standard & Poor’s health care index is projected to approach 10% this year.

The line that divides pharmaceutical companies from biotechnology firms has blurred. The former have traditionally focused on small molecule research, while the latter develop biologics—mainly proteins developed from living cells or gene-based therapies. Broadly speaking, the potential for growth in biologics is superior, and near-term exposure to patent expirations is less of an issue. That makes biotech companies prime M&A targets.

Gilead Sciences (Nasdaq: GILD) specializes in treatments for HIV, the virus that causes AIDS. The company has three main drugs for the disease: Viread, Atripla, and Truvada. Clinical trials have proven these combination drugs more effective than single-line treatments for HIV.

The HIV franchise, which accounts for three-quarters of Gilead’s revenue, will remain strong. In light of new clinical data, new guidelines are likely to be released this year by US and foreign regulators advising earlier use of antivirals for treating HIV.

Looking a bit further into the future, Gilead is developing a new four-part HIV treatment, dubbed Quad; the component drugs are in early stages of development.

Finally, Gilead has little to worry about on the patent front—patents on Viread don’t expire until 2017. Gilead Sciences is a Buy under $55. (It closed a little below $50 Wednesday—Editor.)

Cephalon (Nasdaq: CEPH) is a specialty pharmaceutical firm focused primarily on pain management and central nervous system disorders. The company’s biggest seller in 2008 was Provigil, a treatment for chronic drowsiness. However, that drug will be subject to generic competition starting in 2012.

To compensate, this year Cephalon is launching a better anti-drowsiness medication, Nuvigil. One of Cephalon’s most promising treatments is Treanada, a cancer drug approved to treat chronic lymphocytic leukemia and, recently, a type of non-Hodgkin’s lymphoma.

This new approval should generate significant growth in 2009. Another cancer treatment is in Phase III trials, and Cephalon could launch the drug as early as 2010.

With a solid stable of older treatments and a number of new treatments in late-stage trials, Cephalon offers dependable growth potential. Buy Cephalon under $82. (It closed at around $70 Wednesday—Editor.)

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