Three Reasons Now Is the TimeI haven't owned a biotech stock in Jubak's Picks since I sold Icos ( ICOS) on June 10, 2003, and I haven't updated my biotechnology portfolio since 2002. But I think right now is a good time to both buy a biotech (I'll be adding one to Jubak's Picks with this column) and to put together a new version of that biotechnology watch list. Why? First, seasonality. We're entering the strongest period of the year for biotech stocks. Says who? Yale Hirsch and Jeffrey Hirsch reach that conclusion in their book
Time for a New StrategyWhy the change? First, the stock market is different today from what it was two, three or five years ago. Investors are more risk-averse and more likely to want to see results before buying, rather than paying up for potential. That favors profitable, more established companies. Also, these well-established biotechs have retreated from annual highs, which makes them more reasonably priced than they've been in a while, and they are likely to lead any recovery in the sector. Second, pipelines still pay. The stocks of companies that make the transition from owners of promising drug candidates to owners of promising drugs with Food and Drug Administration approval are likely to show the biggest pop over the next 12 to 18 months if the stock market recovers from its summer doldrums. That's an important "if" to keep in mind. If investors continue to shy away from equities because they believe stocks are too risky, then biotechnology stocks will not experience a sustained rally.
Group 1: Three Profitable Big-Cap Biotech LeadersAmgen ( AMGN) is down from its early February 2004 peak near $66, but the stock has been rebounding lately. On the basis of the strength of Amgen's product lineup, I predict compounded annual earnings growth of about 20% through 2005. Using that forecast as well as projected earnings per share of $2.85, Amgen is currently selling for a price-to-earnings/growth rate (PEG) ratio of roughly 1 -- historically cheap for Amgen or any stock with this kind of potential growth. The stock is as cheap as it is for a couple of reasons: Investors fear growth could be trimmed by reduced reimbursement benefits, and while Amgen's pipeline of new drugs looks strong in the short and long term, the middle term is worrisome. Chiron ( CHIR) is currently trading at just 21 times projected 2005 earnings, but valuation is not the likely catalyst for this stock. Instead, look to the upcoming fall and winter flu season to put a spotlight on this leader in the flu vaccine segment. Genentech ( DNA) wants to be the world leader in cancer drugs. The company's stock dropped from a peak above $60 in April to $45 at the end of July. In August the stock reversed course, and it appears to be building a base for the rest of the year. Tarceva, a promising lung-cancer drug from Genentech and its partner OSI Pharmaceuticals ( OSIP), is likely to receive FDA approval in late 2004 or early 2005.
Group 2: Four Unprofitable Companies With Potentially Huge PipelinesCell Genesys ( CEGE) has a pipeline full of gene-therapy drug candidates for Alzheimer's, Parkinson's and Lou Gehrig's diseases, but the nearer-term payoff comes from the company's GVAX line of cancer drug candidates. I look for the first drug, for prostate cancer, to hit the market in 2008, with drugs for lung and pancreatic cancer to follow by 2011.
Changes to Jubak's PicksBuy Cell Genesys. This is a highly speculative pick. But when you're looking at the seasonal strength of the biotech sector in the fall and the kinds of worries that are bogging down drug stocks, speculative isn't a bad way to go. A small stock like Cell Genesys will get more pop from any move up in the sector than its bigger brethren. And because the company's leading drugs are still years from market, the stock price is driven by research news from the fall wave of medical conferences, not by worries over things like Medicare reimbursement.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Cell Genesys to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.