One Thing Leads to AnotherThat led to across-the-board losses Friday: Amgen, despite good news, fell 2.5%; Genentech (DNA) fell 4%; Cephalon (CEPH) dropped 5%; Gilead Sciences (GILD) lost 9%; Idec Pharmaceuticals (IDPH) was off 4%; and Genta (GNTA) dropped 9%. But the selloff may have also signaled capitulation. "When you start hearing rumors about this fund or that fund going out of business, it usually signals that we're at a bottom," says Robertson Stephens senior biotech analyst Mike King. "I think we test the 400 levels [of the Amex Biotech Index], but we should hold." Stabilizing the sector is one thing, but getting it to move up in a meaningful way still requires courage not in abundance these days.
|Biotech Hits the Floor
A test of post-Sept. 11 lows is in the offing
|Source: Yahoo! Finance|
"There is just no conviction in the market right now," says one biotech hedge fund manager. "I certainly don't want to be the first one in so I can get run over." Another fund manager, exasperated by indiscriminate selling, even pines for the good old days when sell-side analysts led cheers for stocks -- and investors listened. "Some of the selling [Friday] morning was crazy, but as we reached Sept. 11 lows, I didn't get one phone call, or one email, from any analysts supporting the sector," he says. "Analysts are so skittish these days that they're scared to say anything. The machine is broken." The problem, of course, is that many of the marquee biotech stocks still aren't cheap. Genentech stock has fallen about 20% this year, but the company still trades at 40 times 2002 earnings. Idec Pharmaceuticals is one of the fastest-growing companies in the sector, but how excited can investors get when the stock -- down 17% for the year -- trades at 61 times 2002 earnings or 45 times 2003 earnings? In fact, the only profitable biotech company that looks somewhat attractive these days is Biogen (BGEN), which trades at a relatively cheap 20 times 2003 earnings. But Biogen is loaded with risks. The bull story gets really ugly if its psoriasis drug, Amevive, doesn't get approved later this year. But this negativity won't last forever. Fund manager Alsenas says investors have to pick themselves up off the floor and get back in the game like they did post Sept. 11. That means looking for stocks with good growth stories that have been trampled, unfairly in today's bear market. "Six months from now, I don't want to be kicking myself for not owning these stocks," he says. Alsenas says he's buying CV Therapeutics (CVTX) because its heart drug, Ranolazine, will be a winner, despite a lot of naysayers who believe otherwise. He also likes Scios (SCIO) -- yes, it has a lofty valuation -- but its heart drug, Natrecor, should continue to surprise Wall Street with better-than-expected growth. This is a start, but the biotech sector needs more good news, and more buyers, before it gets its shine back.