Updated from 11:43 a.m. EDTThe biotechnology sector has been rocketing higher in recent weeks, as investors have bid up the shares of both speculative names and established companies in the group. And according to some observers, the ride's not over yet. On Wednesday morning, Merrill Lynch and Credit Suisse First Boston issued positive research notes, saying there's even more upside for biotech. Merrill pointed out that the Amex Biotech Index rose 67% from its intraday low on March 12 to its intraday high on June 6. That climb was followed by profit-taking, which led to what the firm called a modest selloff. But analysts now believe the biotech measure is ready to resume its ascent. The firm said that money flow into mutual funds has improved, while new stock issuance has remained minimal. Other positives Merrill cited include a more accommodating Food and Drug Administration and the belief that the recent string of upbeat news should continue. "Valuations remain well within the historical range, and window dressing into the end of the quarter should bode well for biotechs," Merrill said. Merrill, as other analysts have indicated, said the FDA seems to be approving products faster, particularly those that treat life-threatening diseases. Additionally, the firm said that positive news surrounding several products, including Genentech's ( DNA) Avastin, a proposed treatment for cancer, has increased interest in the biotech group.
Finding ValueIn the last 12 years, biotechs have had average price-to-earnings ratios of 35 and price-to-earnings-to-growth ratios of 1.60. The P/E range has been 25 to 50, and the PEG has been between 1.0 and 2.0. Currently, biotechs have 35 multiples and PEG ratios of 1.70, based on forward 12-month estimated earnings, Merrill said. "We believe that biotech valuations could reach the upper end of the valuation range, which should allow the stocks to trade higher than current levels," the firm said.
Investors should focus on companies with improving fundamentals and the potential to issue positive news, the firm said. Its top picks among large-caps are Genentech and Gilead ( GILD). Merrill's best recommendation in small-caps is NPS Pharmaceuticals ( NPSP). Additionally, Merrill raised its price targets on Gilead to $62, Amgen ( AMGN) to $76 and NPS to $36. Meanwhile, CSFB reiterated its overweight rating on the biotech sector and raised its price targets on most of the companies it covers to reflect "improved fundamentals, lower discount rates and/or positive earnings revisions." CSFB said its top large-cap picks remain Amgen and Genzyme General ( GENZ). The firm's best mid-cap and small-cap ideas are Icos ( ICOS), Myriad Genetics ( MYGN) and Neurocrine Biosciences ( NBIX). The firm raised its price target on all five stocks and has on outperform rating on each of them. CSFB also upped its targets on Genentech, Gilead, Human Genome Sciences ( HGSI), Idec Pharmaceuticals ( IDPH), MedImmune ( MEDI), Millennium ( MLNM) and Biogen ( BGEN). "While we do not anticipate the outsized gains that characterized the first five months of 2003 to continue, valuations remain reasonable, fundamentals continue to improve and ample stock catalysts lie ahead," CSFB said. According to the firm's calculations, the biotech sector is up 43% for all of 2003. "Biotech stocks continue to benefit from high earnings growth rates, dependable operating results, good insulation from the economy and an interest rate environment that rewards investment in long-lived assets," the firm said. "The twin features of 'high beta' and earnings dependability are a potent combination in a market where investors seek to avoid landmines." The Amex Biotech Index gained 3.2% Wednesday, and the Nasdaq Biotech Index added 4.1%.