NEW YORK ( TheStreet) --'Tis the season for sell-side analysts to issue their sector outlooks for the coming year. The J.P. Morgan healthcare team released its 2010 forecast this morning, in advance of the firm's big healthcare conference next week in San Francisco. The firm's top biotech picks for 2010 are Celgene ( CELG), Incyte ( INCY), Ipsen and Actelion. J.P. Morgan's Geoff Meacham's macro view of the biotech sector: "In 2010, we are cautiously optimistic on the group with a bias toward small and mid caps and selectivity among the large caps. The worst may be behind us regarding healthcare reform fears, and further multiple compression seems unlikely, but overall sentiment remains negative toward the group, which could create an attractive entry point. We think 2010 will be a year when performance is event-driven, not earnings-driven, given maturation of the biotech sector and the emphasis on sustainability of growth." Meacham on small and mid-cap biotech in 2010: "Small and mid caps should continue to lead innovation in the sector, which could spark M&A activity and a favorable deal environment. In addition, a rebirth of the biotech IPO in 2010 could be a big positive for the group by disproving the notion that pipelines within the industry are thin and by expanding the investable universe. Valuation-wise, small and mid caps are not cheap (4.4X EV/Rev, up from 4X in early 2009) but should broadly benefit from high scarcity value, upside growth prospects and good access to capital." Meacham on 2010 M&A activity: "Pharma companies at the 2009 J.P. Morgan Healthcare Conference cited awillingness to do 'more deals and bigger deals,' leading us and the Street to inferthat there would be increased biotech M&A last year. 'More deals' didn't reallymaterialize in 2009, with four announced deals with public biotech companies...
"Looking to 2010, we think that M&A activity for small and mid-cap cap biotech may pick up, driven by Pharma but also driven by large cap biotechs. In this report, we've stressed pipelines and sustainability of growth, but as growth in the large cap group matures, increased cash flow generation may fuel increased M&A activity." Meacham and his team see the following companies in its U.S. coverage universe as having "high strategic value" in 2010: Acorda Therapeutics ( ACOR), AMAG Pharmaceuticals ( AMAG), OSI Pharmaceuticals ( OSIP), Medivation ( MDVN), United Therapeutics ( UTHR), Vertex Pharmaceuticals ( VRTX), Human Genome Sciences ( HGSI), Seattle Genetics ( SGEN) and Savient Pharmaceuticals ( SVNT)." Meacham on new biotech IPOs in 2010: "Looking ahead to 2010, we think the IPO window in biotech is likely to open againfor several reasons: First, the healthcare reform overhang should be lifted, which should drive fund flows back into healthcare and biotech. Second, the economy has stabilized to a point where there is an increased appetite for risk, especially as the early cyclical trade draws to a close. "Third, there is demand for new stories in biotech. We have consistently heard that a lot of the names in biotech are too 'picked over,' and investors are hungry for new ideas. Fourth, there are a lot of interesting, high-quality, later-stage IPO stories that are likely to attract significant investor attention." Geoff Porges of Sanford Bernstein on the four reasons why he likes the big-cap biotech group despite last year's dismal performance: "First, operating performance is likely to continue to be solid, with some modest upside, in the first part of 2010. Guidance is likely to still be cautious, but may be marginally more encouraging than in 2009 when demand appeared to be stalling for certain products. Second, important late stage pipeline assets are reaching pivotal regulatory and commercial milestones and could drive a reversal of negative sentiment about the group as they come to market in the next 18 months.
"Third, valuations remain in the bottom quintile of their ten year ranges, reflecting near-universal negative sentiment today. Fourth, healthcare reform is reaching an end, of some sort, which so far does not impose a particularly onerous burden on companies in this group and should offer incremental volume, for some products at least, in 2011 or 2012 when expanded coverage is accessible." Porges' picks for best and worst stock performance in 2010: "While the best performers in biotech in 2009 were mid cap and emerging stocks such as Vertex, Human Genome Sciences, Dendreon ( DNDN), Protalix ( PLX), and Incyte, we find it hard to see those same names offering as much upside in 2010. The stocks with the greatest upside to our estimates for 2010 are Genzyme ( GENZ), Gilead Sciences ( GILD), and Celgene and the stocks with the greatest upside to our target prices are those names, plus Amgen ( AMGN), all having 20-40% upside potential at current levels. The stocks where we perceive the greatest risks to our forecasts and estimates are Alexion ( ALXN) and Biogen Idec ( BIIB)." Lehman Brothers issued its 2010 biotech forecast Monday morning. Here's analyst Jim Birchenough's take on the sector and the firm's top picks: "Opportunities for the U.S. biotechnology group are selective and we tend to prefer small-mid cap stocks over large-cap stocks overall in 1H10. Within the large cap group our rank order of preference is Amgen, Genzyme and Celgene as top picks with Gilead and Biogen Idec viewed less favorably. Top mid-cap picks include Amylin Pharmaceuticals ( AMLN), Cephalon ( CEPH), Human Genome Sciences, Onyx Pharmaceuticals ( ONXX) and Regeneron Pharmaceuticals ( REGN) while we are less positive on Theravance ( THRX), OSI Pharmaceuticals and Zymogenetics ( ZGEN).
"Balance sheet concerns persist with small-cap names although top picks Rigel ( RIGL), Isis Pharmaceuticals ( ISIS), Cardiome ( CRME), Array Biopharma ( ARRY) and Ariad Pharmaceuticals ( ARIA) have benefited from, or should benefit from meaningful partnership funding and support. With M&A as a major theme we continue to advise focus on antibody products, key therapeutics areas like hepatitis C, orphan indications, and companies with shared economics with larger partners."
Either way, the search for a new Biogen CEO, which the company said is already underway, will be an interesting process to watch. Now that Mullen is essentially a lame duck, it's reasonable to expect the company's board -- including Icahn's proxies -- to take a more active management role. Naturally, speculation will increase that Biogen could be placed back on the sale block. It might be lost amidst all the palace intrigue, but Mullen did manage to bring home a 12% return for shareholders in 2009 -- making Biogen the only big-cap biotech stock to close the year in the green. Still, Biogen does face challenges ahead with the increase in the number of cases of the serious brain infection known as PML tied to use of its multiple sclerosis drug Tysabri. The company has also experienced setbacks recently with its late-stage drug pipeline. Biogen shares closed Monday at $53.64, ahead of the announcement of Mullen's retirement.
Of course, the roster of big-cap biotech CEOs isn't complete without mentioning the most respected -- and successful -- of them all: Genentech's Art Levinson, who stepped down last year after the takeover of the company by Roche. I don't know what sort of farewell speech Mullen is planning for June, but he might get some ideas from this video of Levinson speaking to Genentech employees at a surprise rally in his honor held last March. -- Reported by Adam Feuerstein in Boston