After Thursday's Bloodbath, Is Biopharma a Buy?

Even though nearly every analyst this morning is saying Thursday's bloodbath was an overreaction, investors are continuing to sell biopharma stocks in the early going Friday.

There are two main issues putting pressure on the stocks. For big pharma, investors are worried about President Obama's proposal to raise the rebates the companies would have to provide for popular drugs bought by Medicaid. And for big biotech, the fear is over the administration's roadmap for getting cheaper, generic versions of expensive, supposedly harder-to-reproduce biotech drugs on the market.

Most analysts believe generic biotech drugs are years away. And many say that the earnings impact of the increased rebates, if they become a reality, are not as big as investors seem to think they'll be for the drug companies.

Leerink Swann's Seamus Fernandez tells clients in a research note this morning, "We believe yesterday's stock price reaction across all of U.S. pharma is exaggerated...." For example, he says the earnings per share impact for Pfizer (PFE) is less than a penny. Nevertheless, investors have already taken shares of PFE to yet another multi-year low of $12.30 this morning. The stock last closed at that level in September 1996. Leerink may trade in PFE, Bristol-Myers Squibb (BMY) , Eli Lilly (LLY), Merck (MRK) and Schering-Plough (SGP).

And in the biotech sector, Deutsche Bank's Mark Schoenebaum sent out a blitz note with the subject line, "Mean 2010 Biotech PE Is Now Under 15x !!" Translation: the sector's on sale. The double exclamation points are his emphasis.

But investors don't seem to be heeding his call. Celgene (CELG), Amgen (AMGN), Gilead Sciences (GILD), Biogen Idec (BIIB) and even Genentech (DNA) are all significantly lower Friday morning. DNA shares have fallen back below the $86.50 offer from Roche (RHHBY.PK). We'll hear much more about that at the company's analyst-investor meeting on Monday in New York where I'll be reporting live. Genentech hastily moved up the date from near the end of the month so it could get its message out before the hostile tender offer expires in a couple weeks.

Comments

[jimmy Turano:]

GOOD ARTICLE MIKE. IF ANALYSTS KNEW WHAT THEY WERE DOING LATELY IT WOULD BE AMAZING. IT'S OVER DONE, YET WE ARE IN A DEPRESSION. STOCK HAVE GONE DOWN TO MUCH, BUT DOW IS SIGNALING FURTHER TURMOIL AHEAD. EVEN JAN.6TH CRAMER WAS BULLISH ON THE DOW,THEN 9,100, TODAY 7,062. RESEARCH ANALYSTS, STAR MINE EXPERTS ARE ALL SCRATCHING THEIR HEADS. WHY, BECAUSE WE ARE IN A DISASTER MODE THAT WILL NOT BE FIXED BY STIMULUS 1,2,3, OR 4. AND IT IS GOING TO GET WORSE. THIS IS A SERIOUS PROBLEM IN AMERICA RIGHT NOW AND THE COLLATERAL DAMAGE HAS TO FINISH ITS COURSE OF DESTRUCTION BEFORE A PROPER ASSESSMENT CAN BE MADE ONCE AGAIN.

Feb 28 09:12 AM

[wdhalgren:]

Political risk for the pharma/biotech sector has entered extreme territory. analysts have been ignoring that for years, blithely assuring investors that the US would never force drug makers to modify their monopoly pricing model. Meanwhile, newer biotech companies have provoked an arms race of drug pricing, asking amazing sums for drugs under the premise that the government and industry would continue to accept them without blowback. Some of the pharmaco-economic modeling (from drug industry and analysts) has been reminiscent of the time of analysis done by dotcom analysts during the late 90's.

Now comes the problem. If you look at the current and future liabilities of governments, states, employers, health plans, the numbers are staggering. Now add in the current state of the economy, and future ecoomic growth under a period of deleveraging. The outcome is that serious savings must come from somewhere. Military spending is obvious, but healthcare is probably more important. If drug price escalation is allowed to continue (Alexion's Soliris costs 500K a year), healthcare could be the dealbreaker for the entire US economy.

Upshot, big changes are coming, and drug price negotiations are in the middle of the table. That is not priced into the stocks as yet, particularly companies like Gilead, Celgene, Amgen, Genentech, Alexion, Genzyme, Lilly (erbitux), Astra Zenica (Synagis), OSI Pharma, etc. The heady days of driving executive stock option compensation through extreme drug pricing are done. The investment community is just starting to realize that.

Feb 28 06:33 PM