Following The Market - Part 2

Summer was a rough period for the biotechs, and now investors are wondering if we are approaching the bottom for the sector. Bottom will only be obvious in hindsight, but we are inclined to believe that we are almost there. Several times, we experienced an oversold bounce within a downtrend. At its worst moment, the NASDAQ biotechnology index (NBI) lost 14%. Currently the value year-to-date is 6%. So far in 2004, the NBI has slightly underperformed the Dow-Jones Industrial Average and has performed better than the NASDAQ composite.

While companies generally met or exceeded earnings expectations for the second quarter, they did not significantly raise earnings forecasts. And in a bear market, especially one accompanied by the threat of rising interest rates, valuation multiples are typically compressed. Historically, tighter monetary control has adversely affected the sector but showed a disproportionate impact on the small-cap stocks. Over the past 23 years, during the eight periods of interest rate tightening, small-cap biotech has underperformed the broader indices. Interestingly, during the last ten years in which two periods of interest rate hikes occurred, the large-cap biotech group has outperformed the broad market.

One company that we project to do very well is Gilead Sciences/NASDAQ: GILD. Recently, Gilead Sciences announced earlier-than-expected final marketing approval from the FDA for Truvada, a combination of Viread plus Emtriva, for the treatment of HIV infection. The product's PDUFA action date was September 12th. Then on August 26, the company announced preliminary analysis of a late-stage trial Truvada was better able to control levels of HIV than Combivir, GlaxoSmithKline's drug. The favorable results were seen in a review after 24 weeks of an ongoing 48-week trial comparing the medicines. The preliminary data showed 88% of patients taking its drugs got their levels of HIV down to less than 400 copies/mL, compared to only 80% of patients receiving Combivir, a statistically significant difference.

Investors should expect strong and steady uptake of Truvada, as the drug will establish itself as the preferred backbone for HIV treatment regimens, offering as good an efficacy as any regimen, and a superior side effect profile. Truvada's launch will continue to drive Gilead's share price for the remainder of the year. Truvada's biggest impact will come in its ability to leverage Viread's leading market position as well as to drive Emtriva's market penetration.

Gilead Sciences has a diverse product portfolio based on its core competency in infectious diseases and oncology. With the anticipated strong sales of Truvada, target price for Gilead Sciences has been revised to $72 per share.

It now appears that share prices have leveled off. We anticipate the biotech sector will rebound as investors anticipate news flow that will likely come this fall when investment banks will be holding biotech investor conferences in September and October. The medical meeting calendar also gets busy for the rest of the year. In our current issue, we cover what's in store for the balance of the year.

Nadine Wong


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