Big-Cap Biotechs Are Too Rich for This Analyst's Blood

What a call by Eric Hecht, analyst from Merrill Lynch, on the big, fat biotechs.

Just take a bit of your money off the table, these things are too expensive, the analyst says. As another sell-side analyst pointed out earlier this week, if you're buying these stocks at these levels, you aren't investing, you're chasing the next hot sector.

Biotech watchers are still stunned by the moves that the big-cap names have made this year. They think the mainstream investors who are just getting into the area don't know the industry well. Not that watchers of the sector haven't enjoyed it, but they are nonplussed with things like recent analyst reports that put out price targets that equal 60 times 2001 earnings. See any analyst on Genentech (DNA). How about 75 times 2002? Why not?

With this call, Hecht makes a bid to seem a clear-headed analyst. In a morning note, the analyst made an anti-momentum valuation call on the group. He downgraded Amgen (AMGN), Biogen (BGEN), Idec (IDPH), Genzyme (GENZ) and Medimmune (MEDI) to short-term accumulate from short-term buy. He maintained his long-term buy. He already has bestowed the same ratings on Immunex (IMNX) and Genentech. (Merrill has performed recent underwriting for Amgen, Biogen and Genentech.)

On Wall Street, that probably means accumulate this week and buy next. But no matter. Hecht has solidified a place for himself in the notable calls pantheon. Now, the question is whether he'll be remembered as a hero.

Certainly, the Merrill analyst moves markets. And he was doing that Wednesday -- at least briefly. Three of the stocks were down, Medimmune, Genzyme and Idec. Amgen opened down on the Merrill note, but managed to recover and closed up 9/16 at 81 7/16. The Nasdaq Biotech Index was actually up 4.32 points, or 0.68%, to close at 637.43.

So has Hecht's pessimism been dismissed? Is he way too early? In the world of biotech, Hecht is regarded as an excellent stock-picker. But he's aggressive, and his timely downgrades can often generate dissatisfaction. David Holveck, the chairman and CEO of Centocor (CNTO) called him a "rogue analyst" on CNBC in late 1997 after one such downgrade. The stock didn't get back to where it was then until July of this year.

At least one specialist biotech investor thinks he's right on with his latest call. "I told Eric it was a great call because it doesn't matter if it's three months or six months from a correction," says a hedge fund manager. "Everyone is going to remember he was first."

Hecht said in his brief note that the group is trading at 1.7 times its price-to-earnings to growth ratio, 46 times 2000 estimated earnings and 12.1 times its market-cap-to-revenue ratio. All three are all-time highs, he pointed out.

Nevertheless, Hecht noted that earnings estimates have been steadily rising, which he expects to continue. The analyst said that the shares of the big guys will continue to rise, just at a slower pace than they have so far this year.

The Nasdaq Biotech index was up 107% over the last year till yesterday, 38% over the past six months and 32% over the past two months, Hecht observed.

The hedge fund manager has been lightening up on big-cap biotech holdings of late. "Do you know anyone of the traditional biotech buyers who are buying here?" the manager asks. Mostly it's new, generalists who are pushing the stocks up. They've rotated out of pharmaceutical stocks over the last nine months or so and partly into the biotechs. "Things are fine. The stocks have had a huge move, but the valuations are getting stretched.

"How many times over the last 15 years have you had multiple opportunities to buy these at cheap prices? I don't see why this cycle is any different."

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