Biotech Stocks: Sector Outlook and Top Picks

Recently, we sat down with Zacks senior biotechnology industry analyst Grant Zeng, CFA to discuss fourth-quarter earnings season among his group, and where he expects the industry to be headed throughout 2008.

Now that most biotech companies have reported earnings, has your outlook for fiscal year 2008 changed at all?

As I said in the previous interview, my outlook for the biotech industry, in general, is positive. I am confident growth will continue for 2008 and beyond. The driving forces behind the continued growth are still in effect, which are derived from the high need for quality, innovative medicines that target a broad variety of diseases such as tumors, central nervous system disorders, cardiovascular diseases, diabetes and infectious diseases. U.S. and global healthcare spending will continue to grow dramatically due to demographic changes and high economic growth in the emerging market.

Although the U.S. and global economies are projected to slowdown or even to slide to a recession in 2008, our outlook for biotech industry is still positive. The U.S. economic slowdown or recession has only a limited impact on the biotech industry, in my view.

Would your advice to prefer biotech companies with products on the market still stand, or are there some companies with pipelines that are even more intriguing right now?

Before you invest in any biotech company, you need to do a comprehensive research about that company. When I say “comprehensive,” I mean there may be many criteria for your judgment. I certainly prefer a company with approved products on the market; in such a case, risk will be reduced.

Of course, the approved products must have a meaningful contribution to the company’s top-line growth. Sometimes, the pipeline is more important for a biotech company. Of course, the pipeline candidates must have potential if approved. One good example would be Regeneron Pharmaceuticals Inc. (REGN). The company recently received approval of Arcalyst for the treatment of CAPS. Since CAPS is a rare genetic disease, the market for it is very small.

We believe Arcalyst will only have a limited impact on the company’s top-line growth in 2008 and beyond. However, the company has a decent pipeline with great potential in cancer, eye disorder and other inflammatory diseases. In such a case, the pipeline is more important than the approved product.

What are your top Buy recommendations at this time?

My top picks of biotech companies are Regeneron, ZymoGenetics Inc. (ZGEN), Eurand N.V. (EURX), Myriad Genetics and BioMarin Pharmaceuticals Inc.

Are there any major developments you are anticipating among companies in your coverage looking ahead?

Yes, there are some companies in my coverage which will have some major developments in 2008. One example would be Dendreon Corp. (DNDN). The company filed a Biologics License Application [BLA] for its prostate cancer drug Provenge in middle Nov 2006. The company received positive opinion from a FDA panel to approve Provenge in March 2007. However, the FDA issued only an “approvable” letter in May 2007, requesting new clinical data from its phase III trial IMPACT.

The FDA will accept either a positive interim or final analysis of survival data from its ongoing IMPACT study to amend the BLA for Provenge. The interim data will be available in 2H08.

Another major development will be from Genta, Inc. (GNTA). The company filed New Drug Application [NDA] of Genasense with the FDA for the treatment of Chronic Lymphocytic Leukemia [CLL] in conjunction with chemotherapy in 2005. The FDA issued a “non-approvable” letter in December 2006. Genta filed an appeal to reverse its opinion in April 2007 based on new analysis of data. The FDA will make a decision by the end of March 2008.

Other major developments will be to advance product candidates into advanced clinical studies and in-license and out-license deals made by multiple companies. It is always advisable to keep informed about all newsworthy events for companies’ stocks one holds in his or her portfolio.

Grant Zeng, CFA is a senior analyst covering the biotechnology industry for Zacks Equity Research.

Comments

[PortfolioManager]

ZymoGenetics is certainly undervalued right now. The total market cap is less than the value of their approved drug, Recothrom, much less their pipeline. Their team has now developed seven approved drugs. If you think about the total number of new drugs approved in a given year, seven drugs is a pretty impressive number.

BioMarin is also an excellent company, but as far as I can tell it is not quite as grossly undervalued as ZymoGenetics.