West Coast Editor
SAN FRANCISCO — The annual JPMorgan H&Q Healthcare Conference, drawing a record 5,000-plus attendees, closed last week with its traditional analyst wrap-up, where members of the firm sought to offer a “big picture“ outlook on the coming year and provided their choices for stock buys.
Alex Zisson, managing director of general health care, congratulated members of the audience in the Grand Ballroom of the Westin St. Francis hotel for having survived “the pushing and shoving and elbowing and kicking“ that was figuratively necessary in order to navigate the packed hallways of the venue.
“For better or worse, you get to hear the analyst wrap-up,“ he said.
That “better or worse“ choice is seldom absolutely clear in the volatile biotechnology industry, where surprises abound. Witness the scandal of ImClone Systems Inc., whose stock recently took a beating after the FDA’s refusal of the firm’s rolling biologics license application for Erbitux, a chimeric monoclonal antibody that binds to epidermal growth factor receptors, in irinotecan-refractory colorectal cancer.
The problem pushed back the potential product launch by six months, and stalled a $300 million milestone payment from partner Bristol-Myers Squibb Co., and ImClone’s difficulties were much the buzz at the health care conference.
Overall, though, Zisson said “macroeconomic issues are the keys right now.“ He saw “surprisingly little controversy about whether the biotech sector is healthy, whether the hospital sectors are healthy, nursing homes . . . There’s a little bit of uncertainty maybe about where HMOs are, and where some of the big drug companies are, but even as skeptical as people are, drug companies are still growing — earning 11 percent per year, which is still more than the average American company, and valuations are compelling for just about all health care sectors.“
Timing is an issue now, Zisson said. Common advice has said not to own health care stocks when an economic recovery is under way or in an election year, “because you have a combination of a lot of anticompany rhetoric and a lot of uncertainty over who will win the election and what legislation might get passed. People are a little more positive on both of those,“ he said.
As a subject for political debate, Zisson said, health care “is probably not as high up as in previous years. Instead of being No. 1 or 2 it’s probably No. 6 or 7, based on some polls. In the long run, I think it’s clear that health care will out-perform in a 12- to 24-month time period.“
Carl Seiden, managing director for pharmaceuticals, called the prognosis “decidedly mixed. I do think the risks tilt modestly toward the positive side, but the crystal ball is a bit cloudier than I would like it.“
Drug pricing is “a natural whipping boy; it’s a popular issue for people who are looking to get re-elected,“ he noted, but Medicare drug pricing, “usually the big issue in Washington, might not be a high-profile debate issue this year.“ At the moment, state-by-state Medicaid drug pricing “seems to have taken center stage. It’s certainly bad for headlines, [but] it’s not an imaginable risk to me, in terms of earnings.“
Biotechnology joining the antiterrorist effort might grab more of the spotlight, Seiden said.
Bristol-Myers “enjoyed kind of derivative high-profile positioning because of everything that’s going on with ImClone and Erbitux — obviously not good news for Bristol,“ but other pharmaceutical companies are keeping their heads down, he said.
“Five out of seven have lowered estimates for the year 2000,“ he said. “I’m calling it the year of the hockey stick forecast. Everybody had disappointing earnings, but [they are saying,] ’Trust us, come 2003, we’re off to the races.’“
Only two companies had no disappointments on the earnings front: American Home Products Corp. and Pfizer Inc.
The latter, Seiden’s favorite, is “simply a machine. Their financial flexibility is truly awesome. People rarely look at cash flows in this industry. They’ve got $12 billion in cash today. Five years from now they should have $72 billion.“
AHP, for its part, is the “safest company I follow, looking at 15 [percent] to 16 percent growth for the next several years,“ he said. “Six months ago, [that] wasn’t meaningfully above the industry average. It is today. All the things driving that growth are on the market.“
The main cause of the general pharmaceutical slowing is patent expirations, Seiden said.
“I love them because of their predictability,“ he said. “It’s horrible that we have a cluster of them all at once, but we know when they start and when they end. It’s not heroic to predict acceleration, come 2003.“
In biotechnology, David Molowa, managing director of biotechnology and life sciences technologies, said the industry has, during the 11 years he has covered it, “gone legit. Now, basically everybody needs to own biotech. It’s just a question of how much.“
His pick was Invitrogen Inc., “with very high-quality, high-visibility earnings. The company will generate probably close to $700 million in revenue this year, the top line is growing 20 percent [and] because of gross margin improvements, you’ll see earnings grow in excess of 25 percent.“
Molowa predicted Invitrogen will “do well regardless of the macroeconomic environment.“
Franklin Berger, managing director of biotechnology, chose to focus on the “micro“ view.
“What is very clear from the last four days is that there’s a revolution in microbiology, and that’s changed the biotech industry,“ he said. “Unlike the last few years, when the feeling was, ’Be in the sector or be out of the sector?,’ [it] will be, ’Let’s get back to stock picking.’“
Berger said he likes Genentech Inc., which is “sitting on the cusp of about six product life cycles, as well as still growing out the Rituxan [rituximab] life cycle. Also, it’s the premier partner in the biotech industry, with 39 partners and more to come.“
In the “up and comer“ category, Berger chose Gilead Sciences Inc., for Viread (tenofovir disoproxil fumarate), its HIV drug, which the company said earlier this month would take it to profitability in 2002. “We had concerns about the narrow label,“ Berger said. “Those concerns have been washed away by talking with HIV specialists.“
Berger also pointed to Regeneron Inc., “a name that was little heard“ but clearly strong, with an obesity drug, Axokine, a second-generation ciliary neurotrophic factor, in a Phase III study that became fully enrolled earlier this month, and other promising technology.
“You’ve got the better mousetrap for an inhibitor of cytokines,“ he said.
In genomics, “which was the favorite word last year and has fallen into ill repute, if not disrepute, in the last six months,“ Berger advised owning Lexicon Genetics Inc., which “has more targets per dollar per share“ than any firm of its kind.
Another Berger pick: Seattle Genetics Inc., “perhaps among the pre-eminent companies in antibody engineering,“ one of the more promising areas. “I see a lot of people flying to Seattle to discuss how to improve their antibody therapeutics,“ he said. Yet another: GenVec Inc., the gene therapy company, which has had encouraging results in coronary treatment and cancer, he said.
Maged Shenouda, biotechnology analyst, chose Versicor Inc. as his top pick, noting that the market has recognized much of the firm’s value but more upside remains, based on anidulafungin and dalbavancin, from which data are expected soon.
Rob Olan, life sciences technology analyst, said it’s “going to be a hard year to make a lot of money with a lot of my names. There are a lot of high-quality names, but I think those names are very well recognized.“ He mentioned Affymetrix Inc. and Applied Biosystems Inc.
“In order to make money, you have to go for a stock that may have had some issues or is a second-tier company,“ Olan said. “I’m not sure that, given a year time frame, my pick is going to do immediately well in terms of appreciation, but longer term is going to do well.“
Olan’s pick is Incyte Genomics Inc., which is “in transition, and gave a relatively uninspiring presentation here,“ but will prove itself later, he said.