Okay. The last several weeks for the biotech sector have been nothing to brag about and it’s best to sweep them under the rug. The correction that started at the end of February has continued through April, but it appears that stocks were due for a pause and were driven by profit-taking, concerns about the overall state of the healthcare sector (Medicare reimbursement, stock option expenses), and the unpredictable FDA. Despite, the market’s pessimism, the recent sell-off should spark a new rally in this sector lured with attractive stock valuation. The industry’s fundamentals remain strong and most earnings-driven companies did meet first quarter estimates. Besides there are numerous upcoming drug approval decisions and potential for pick-up in M&A activity should drive new money into the sector.For instance, with the release of first quarter earnings, Amgen/NASDAQ: AMGN, Genentech/NYSE: DNA and Genzyme/NASDAQ: GENZ have been hit with a wave of selling, but for these companies, it may be reaching its end. Amgen reported decent first quarter earnings, but it was not enough to satisfy investors. We think they wanted really positive news to offset the CERA litigation, which will be a drawn out process. Amgen has filed a complaint with the U.S. International Trade Commission (ITC) requesting an investigation of Roche’s CERA and a permanent exclusion order prohibiting importation based on an infringement of Amgen’s intellectual property. The ITC should decide within 30 days whether to investigate; the investigation process usually takes 15-18 months. Separately, Roche filed three motions in the District Court of Massachusetts in response to Amgen’s complaint; a response to these motions is expected by April 25th. At the same time, Roche intends to file CERA’s BLA this month. As a result, investors’ jitters have been as reflected in Amgen’s share price, which has exhibited a downtrend and has broken through the 50-, 100-, 200- and 250-day moving averages. Once the market has factored in Amgen’s own earnings growth guidance in the low-to-mid-teens, Amgen shares are likely to recover and show support in the low $70’s before reaching toward the $80 level.
New investors should take advantage of any stock weakness. We continue to believe Genentech should represent a core holding as the company remains in a unique position with multiple product launches that represent multibillion dollar opportunities. The company will continue to show potential upside in product sales and earnings given expanding use of Avastin (non-small cell lung cancer) and Herceptin (metastatic breast cancer and front-line breast cancer) in new indications, and the recent market launch for Rituxan in rheumatoid arthritis as well as the anticipated market launch of Lucentis in age-related macular degeneration in the third quarter of 2006. Importantly, the company’s outlook remains robust with projected near-term earnings growth of 45-55% (up from 40-50%) based on revenue growth that we expect to be over 30% with improving operating margins to the mid-30s.
As for Genzyme, its earnings’ shortfall was blamed on lower-than-expected sales of three of its drugs: Fabrazyme, Synvisc and Hectorol, and the costs of preparing to launch Myozyme in Europe, the U.S continued clinical trial and manufacturing infrastructure expansion.
Even with the shortfall, yearly guidance for revenues and earnings were reiterated and management has historically been very good with guidance, so there’s little reason not to believe them. Besides, Genzyme has a very strong pipeline of drugs in various stages of clinical trial. The drugs (Tolevamer for C. difficile colitis, Myozyme in late-onset patients, Synvisc for additional indications, sevelamer carbonate for earlier stage CKD patients, DX-88 for HAE, and Clolar for adult AML) that make their way through will create a new stream of revenue.
Based on historical valuations, the large-cap biotech group is trading close to historical lows. This implies that concerns about maturing products, upcoming competition, and growth rates are already priced in. And despite the concerns on the lack of leadership at the FDA and several disappointing decisions about product approvals, there are still numerous upcoming potential drug approvals that should drive momentum in the sector.
In addition, several products should be filed for approval shortly.
Given that several large pharmaceuticals players are in need to replenish the pipeline to drive future revenue growth and with the recent correction in valuation should increase M&A activity, thereby driving a rally in the sector.
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