Wouldn’t it be great if there were cures for cancer, diabetes, AIDS or myriad other diseases?
You bet it would be. And investors also understand that the companies that came up with such medical breakthroughs would make a ton of money.
Hope springs eternal in biotechnology because medical needs are great, our population is aging and potential riches are enormous. .
Silicon Valley is banking on biotech to lead its comeback. In addition, spring gives biotech stocks a lift because that’s when major cardiovascular and cancer conferences are held, giving products visibility.
“Biotechnology is the home of innovation, and the majority of companies are driven by the news flow at academic conferences, rather than earnings,” said Mark Monane, senior analyst with Needham & Co. in New York.
Meanwhile, big drug companies are paying top dollar to acquire biotech firms to bolster their research. For example, Johnson & Johnson recently paid $317 million for private Belgian biotech Tibotec-Virco.
The catch, however, is that biotech is among the most volatile stock groups. Ninety percent of companies don’t have profits. Ten years typically transpire from the idea stage until a drug completes the regulatory process and consumers receive it. Many “sure thing” products never make it.
When the Food and Drug Administration refused to consider approving ImClone Systems’ highly publicized colon cancer drug Erbitux last December, it sent that company’s stock and the entire biotechnology group into a tailspin. Two-thirds of nearly 50 experimental biotech drugs in late-state testing last year also suffered setbacks.
“The FDA seems a lot tougher with approvals than it used to be,” believes Stefan Loren, managing director and biotech analyst with Legg Mason Wood Walker in Baltimore.
More Top Picks Best Philips Sonicare Diamondclean Alternatives
The Standard & Poor’s Biotechnology Index declined 5 percent in the first quarter of this year, following last year’s 8.6 percent decline. In 2002, product-oriented companies, such as IDEC Pharmaceuticals and Genentech, handily outperformed those emphasizing pure technology.
Low stock valuations mean more mergers and ultimately higher stock prices, but individuals eying biotech must always invest in moderation.
“Biotech is a part of a growth portfolio that should dominate health care in the 21st Century, yet it’s important to be diversified in the companies you choose,” counseled John McCamant, editor of the Medical Technology Stock Letter (www.bioinvest.com), P.O. Box 40460, Berkeley, Calif. 94704. “Have stocks with different market caps to spread the risks and pick them early when they’re lower-priced.”
After a couple of quarters of “muddling around,” biotech stocks should be up modestly for the full year, predicted McCamant. Expect big winners and big losers.
“We invest small amounts in early stage biotech companies with promising products and then add to our investment as they mature and become successful,” explained Linda Moussatos, portfolio manager of UBS Global Biotechnology Fund, which declined 18.76 percent over the past 12 months. “A mutual fund is the best way to go because unless you have the right technical background to analyze the products yourself, it’s hit or miss.”
Ignore the hype and take a long-term view. Look only at companies with good fundamentals, solid management teams, pipelines with more than one product in late stage development and cash for development. Be a stock-picker, selecting a small group of companies.
Monane recommends Scios (SCIO), which makes a drug for congestive heart failure; CV Therapeutics (CVTX), which is working on the first new drug for handling chest pain in 20 years; Genta (GNTA), which is involved in late-stage products to treat cancer; and Telik (TELK), a small company devoted to treating cancer and diabetes that haven’t responded to other therapies.
Array BioPharma (ARRY), which uses a combination chemistry, structural biology and “chemoinformatics” to create new drugs, is a Loren favorite.
McCamant suggests Affymetrix (AFFX), which is on the verge of turning profitable in its business of putting gene sequences on a computer chip, and Onyx Pharmaceuticals (ONXX), in the early stages of developing a human virus genetically engineered to kill cancer cells.
Amgen (AMGN), a global biotech that markets products such as Epogen, Neupogen and Aranesp, is Moussato’s biggest holding. Myriad Genetics (MYGN), with experience in both sequencing the gene and diagnostic testing, is her favorite mid-cap.