This Earnings Season Could Be a Good One for Biotechs

It's that crazy time of the year again -- earnings season -- when companies must prove their worth or face Wall Street's wrath. At the same time, investors are understandably concerned about the market and apprehensive about chasing stocks. And, with everything else happening in the world, it's no wonder the market has been seesawing so much.

I like to follow the indices just to get a feel for how the overall sector is performing. Since the start of the new year, the Nasdaq and Amex biotech indices have been trading down. That's obviously not a great start, but it does appear to be a correction or a pullback of some sort, and investors are trying to anticipate what might come next.

For the biotech sector, the earnings season began on a good note when Genentech announced its fourth-quarter earnings. Genentech's earnings rose, as expected, on increased sales of its two cancer drugs, Rituxan and Herceptin, which treat lymphoma and breast cancer, respectively.

The rest of the big-cap biotechnology companies such as Amgen, Biogen or Genzyme are likely to report solid revenue growth in the fourth quarter, also, on the strength of their drug sales. Significantly, the number of biotech companies that are approaching consistent profitability, such as Cephalon and Enzon, are increasing.

Right now, investors are anxiously waiting for the release of earnings. If positive earnings are reported, the tension should ease and the results should confirm that big-cap biotechs are still fundamentally attractive. Companies such as Amgen, Genzyme, Genentech and Idec Pharmaceuticals are selling products that are at a growth stage, despite a shaky economy. With earnings in hand, Wall Street will be able to determine valuation with price-to-earnings ratios , the P/E-to-growth (PEG ), rate and/or other standard measures, and, we hope, reverse the downtrend.

Then there are the smaller biotechs, the ones who are emerging with new technology that needs to be proven and aren't generating any profits yet. For the average investor, placing a valuation on these companies is sticky at best. Instead, traditional valuation tools are replaced with hype and hope. Here investors aren't as concerned with earnings, but are instead trying to get on board early with what could be the next discovery or technology to fuel Wall Street's interest.

Many of you have emailed me and asked what's in store for 2002. Well, I will tell you this, biotechnology has been a big part of my life in more years than I wish to admit, and I have watched it slowly become what it is now.

In the past, Wall Street caught wind of stories such as mapping the human genome, gene therapy and stem-cell technology, and got investors excited about who or what would be the next latest and greatest. Wall Street tends to be concerned with only the now and has a short outlook. But science and technology must have a long-term outlook because they are about the future and what promises lie ahead.

I don't know what's going to be "hot" this year. There's a lot of interest now in "rational drug design," which is having the technology to discover new drugs more efficiently in terms of cutting costs and time. It's not sexy and it's not a cure for cancer, but it's an important function for drug discovery.

One biotech company that comes to mind in terms of rational drug design is Vertex Pharmaceuticals. It's trading in the lower half of its 52-week range and has a good reputation in the scientific community. So if you are willing and have the patience, it's a good bet this company could pan out.

But if you are going to be a serious biotech investor, start first with a solid performer like the companies I mentioned earlier as your base. Then progress to more aggressive stock picks to build a portfolio. I suspect the market is now suffering from bouts of mental instability, and moments like these can work for you to establish a baseline. There are investors waiting to chase this market, but it's best to keep a steady head and not panic because there are opportunities in this marketplace.