Biotech's Winners and Losers for '08

The biotech sector hinges on presidential race, FDA and mergers.
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It's time to peek ahead at biotech stocks in 2008. To kick it off, let's examine three macro issues that could affect the entire sector.

The presidential election:

The looming November presidential election might weigh particularly heavy on drug and biotech stocks, given that health care is expected to be a front-burner issue.

Don't expect investors to react with much enthusiasm if presidential candidates start calling for price caps or other control measures to curb the rising cost of prescription drugs. Government intervention into drug pricing and/or significant changes proposed to the new Medicare prescription drug benefit could keep a lid on future growth rates of drug and biotech stocks.

Biotech investors need to also keep a close watch on legislative efforts to create a new regulatory path in the United States for so-called bio-generic or bio-similar drugs. Unlike their Big Pharma brethren, biotech companies have never had to face the considerable challenge of low-cost generic competition. That might change with a new face in the White House.

The Food and Drug Administration:

Is anyone happy with the FDA these days? On one side, drug-safety watchdogs are accusing regulators of being too cozy with industry and approving drugs with sketchy safety profiles.

On the other side, patient advocacy groups are knocking the FDA for not approving enough drugs, especially those for life-threatening diseases like cancer. Some of these folks also accuse the FDA of collusion with industry to keep certain drugs off the market so that existing drugs won't face competition.

Suffice to say, it can't be fun to work at the FDA these days. Being bashed from all sides tends to make bureaucrats (and drug reviewers) afraid to do much of anything. This might explain why the number of new drug approvals in 2007 was down sharply from recent years, and why investors are looking ahead with trepidation. New requirements for bolstered drug safety monitoring, both pre- and post-approval, could ratchet up drug development costs.

FDA approval decisions and advisory committee meetings have always been a part of the equation for biotech investing, but 2007 seemed to ratchet up the risk. Whether this trend continues into 2008 remains an open question.

Investors might get some hints from FDA approval decisions for Tysabri in Crohn's disease (

Biogen Idec

(BIIB) - Get Report

and

Elan

(ELN)

and Avastin in metastatic breast cancer (

Genentech

(DNA)

in January and February, respectively.

For a more complete calendar of FDA approval decision data, click

here.

Mergers and acquisitions:

$67 billion. That's the total revenue Big Pharma is expected to lose through 2012 from generic competition. Those sales have to be replaced somehow.

Layoffs and cost cutting at drug companies are on the rise, while research and development productivity appears to be ebbing. That leaves M&A activity, which is why biotech investors should expect drug companies to come a-knockin' with more acquisitions and partnerships in 2008.

Who gets bought? It's a guessing game of course, but popular opinion always seems to lean toward small-cap (read: risky, highly speculative) biotech.

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In fact, the major acquisition targets of 2007 --

Pharmion

(PHRM)

,

Axcan

(AXCA)

,

Adams Respiratory

(ARXT)

,

Medimmune

,

MGI Pharma

(MOGN)

-- were all established companies with approved products and substantial revenue (if not actual profits.)

This is not to say that small biotech firms working on risky, but potentially breakthrough, technologies don't get a bid. That's what happened when

Merck

(MRK) - Get Report

bought

Sirna

this year to move more aggressively into the field of RNAi therapeutics.

It also happened when

Pfizer

(PFE) - Get Report

bought

Coley Pharmaceuticals

(COLY)

for an immunotherapy platform focused on drugs that target toll-like receptors.

In the build-or-buy debate, it seems like Big Pharma is finding it easier to do the latter. This means smaller biotech companies with the ability to identify, develop and manufacture biologic drugs like monoclonal antibodies are likely to be in demand.

PDL BioPharma

(PDLI) - Get Report

is looking to sell itself for just this reason. It wouldn't surprise me to see

Xoma

(XOMA) - Get Report

on the list of acquired companies in 2008.

But one word of warning for investors using the lure of the lucrative buyout as their primary biotech investment thesis for the coming year: Biogen Idec., which put itself up for sale but received no takers.

That covers some of the macro trends in biotech for 2008. There will, of course, be many more storylines playing out on the company level next year. A handful to watch for:

Amgen

(AMGN) - Get Report

: To borrow a phrase, 2007 has been an annus horribilis for the biotech giant. Skidding anemia drug sales, a sluggish drug pipeline, layoffs, cost cutting and the loss of investor confidence have all added up to a steep decline in Amgen's stock price. Can the company turn things around in 2008? Or, will the next 12 months prove to be a Groundhog's Day sequel to 2007?

Genentech: Not as bad as Amgen, but still, two straight years of negative stock price returns is not what Genentech investors have come to love and admire. Finding new growth opportunities for the blockbuster cancer drug Avastin will be key to stirring excitement, as will pushing its mainstay drug Rituxan into new diseases like multiple sclerosis and lupus.

ImClone Systems

(IMCL)

: Now that Carl Icahn has famously failed to find a buyer for Biogen Idec, will the crusty dealmaker turn his full attention back to ImClone? Icahn is the chairman of the board, so he wields the power to get a deal done. ImClone's big cancer drug Erbitux looks like it may make a big splash in lung cancer, so 2008 might be the year that ImClone is bought.

Dendreon

(DNDN)

: Provenge. Enough said.

Alzheimer's Disease: A pivotal year lies ahead for several companies --

Myriad Genetics

(MYGN) - Get Report

, Elan and

Wyeth

(WYE)

. Have these companies discovered blockbuster drugs that can reverse the devastating course of Alzheimer's? Data from clinical trials expected this year will start to give us the answer.

Stem Cells: A Democratic victory in the November election should bring with it federal funding for stem-cell research and a lift to all stocks in the sector.

Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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