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NEW YORK ( Stockpickr) -- What's the hottest investment niche of the past 15 months? Biotech stocks -- by a long shot.
While many industries and sectors have risen a respectable 10% or 20% in that time, the Amex Biotechnology Index has risen a stunning 60%. Lest you think that the index simply rode the backs of small, speculative biotech stocks that happened to strike a major partnership or saw a key drug approved, know that it focuses on the industry's largest and most stable players.
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Why did these major biotech stocks take off like rockets in 2012? First, the Food & Drug Administration has improved the drug approval process, removing some of the mercurial decision-making that it had been known for in prior years. Also, investors grew less concerned that looming changes in health care would dampen profits for the drug industry -- though it's not clear if that attitude will last. Our nation's health care system remains very expensive, and companies can expect to see tougher reimbursement pressures in the years ahead.
After stunning gains, many of these biotech firms now look fairly valued on profit forecasts for 2015 or 2016. Based on 2013 profit and profit growth rates, these stocks look downright frothy.
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Celgene(CELG - Get Report) focuses on various types of cancers, especially blood cancers known as multiple myeloma, and has been a top performer in the industry for more than a decade. Thanks to a deeper look at its pipeline of new drugs that should fuel growth over the next few years, investors have bid shares up more than 50% over the past six months. The current $42 billion market value equates to nine time trailing sales and seven times projected 2014 sales. That's rich.
Yet it's the profit outlook that should give you pause. Celgene is expected to earn roughly $5 a share in 2013 (on a GAAP basis) and around $6 a share in 2014, implying a 2014 multiple of around 16. Trouble is, further profit gains will become harder to achieve as many of this company's current top-selling drugs will increasingly be exposed to generic competition. It's that patent cliff that many drugmakers face that explains why many of them trade closer to 10 times projected profits.