This Earnings Season Could Be a Good One for Biotechs - TheStreet

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

I like to follow the indices just to get a feel for how theoverall 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 apullback of some sort, and investors are trying to anticipate what mightcome next.

For the biotech sector, the earnings season began on a good note when

Genentech

(DNA)

announced its fourth-quarter earnings. Genentech's earnings rose, asexpected, 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

(AMGN) - Get Report

,

Biogen

(BGEN)

or

Genzyme

(GENZ)

are likely to report solid revenue growthin 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

(CEPH)

and

Enzon

(ENZN)

, 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 shouldconfirm that big-cap biotechs are still fundamentally attractive.Companies such as Amgen, Genzyme, Genentech and

IdecPharmaceuticals

(IDPH)

are selling products that are at a growth stage, despite ashaky economy. With earnings in hand, Wall Street will be able to determinevaluation 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 newtechnology that needs to be proven and aren't generating any profits yet.For the average investor, placing a valuation on these companies is stickyat best. Instead, traditional valuation tools are replaced with hype andhope. Here investors aren't as concerned with earnings, but are insteadtrying to get on board early with what could be the next discovery ortechnology to fuel Wall Street's interest.

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

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

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

One biotech company that comes tomind in terms of rational drug design is

VertexPharmaceuticals

(VRTX) - Get Report

. It's trading in the lower half of its 52-week range and hasa good reputation in the scientific community. So if you are willingand 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 witha solid performer like the companies I mentioned earlier as your base. Thenprogress to more aggressive stock picks to build a portfolio. I suspect themarket is now suffering from bouts of mental instability, and moments likethese can work for you to establish a baseline. There are investors waitingto chase this market, but it's best to keep a steady head and not panic because there are opportunities in this marketplace.

Nadine Wong is the editor, publisher and co-founder of the

BioTech Sage Report

and contributes a weekly biotech column to this site. At the time of publication, Wong had a position in Amgen, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While she cannot provide investment advice or recommendations, Wong invites you to send comments on her column to

Nadine Wong.

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