By Randall Osborne
SAN FRANCISCO It was the best of times, it was the worst of times. . .
Well, the second half of 2000 may not have been the absolute worst of times, market-wise, but it was full of bleakness and uncertainty. And the first half had roared so powerfully that it made the year biotechnology's best overall.
At the finish of the annual J.P. Morgan H&Q Healthcare Conference here, analysts gathered to try making sense of what happened, and figure out what might happen next.
During the wrap-up, experts took their turns at the lectern in the Grand Ballroom of the Westin St. Francis hotel, naming their favorite stocks for the year ahead.
Analyst David Molowa, of the biotechnology and life sciences technologies research group, said he introduced 31 companies during the event, and concluded "the near-term fundamental outlook for the industry is actually quite good. Not great, but I would say good."
He allowed that analysts are "not looking for tremendous surprises on the upside from the leading companies, financially. . . [but] people really want to own the group.
"The question is not, 'Do I invest in biotech?' The question seems to be, 'When?' and then, 'With which companies?' Personally, I think when is now. For some of the better companies out there, the higher quality companies, I can finally talk about valuation once again, where the past 12 months or so, I couldn't even use the 'V' word, and didn't want to."
Molowa said that "as we get through the next few quarters, and companies report their fundamental operations are good, and we hear about the pipeline news, I do believe you will see some differentiation. Some of these leading companies' stocks will perform well from their current levels."
His stock pick was Biogen Inc., a choice that some might not expect, he said, because of slowed interest in Avonex (interferon beta-1a) for multiple sclerosis. That, he said, will change.
"That's what is baked into this stock," Molowa said. "Personally, I think Avonex is not dead. It's an $800 million product [and] things have started to pick up domestically. I think they're competing better in Europe, and with more clinical data coming down the road, there's a lot of legs left in Avonex, and it's a very high-margin product for the company."
Coming soon is Amevive (recombinantly engineered LFA-3/OgG1 human fusion protein) for psoriasis, which will give still more value to the stock, he said.
"The company's going to turn the card over in the second quarter with regard to Phase III clinical data for this product," Molowa said, and he predicted they will be favorable.
"We're not going to see the data until the end of the year, but I'm sure they will issue a press release telling us whether it was positive or not, and there will be some re-treatment data from a Phase II trial presented in March," he said.
Making a more predictable choice was analyst Franklin Berger, who pledged his faith in Genentech Inc., on the strength of its pipeline and products.
"[Buying Genentech] strikes me as a very appropriate way to be exposed to a variety of product categories that are all high growth," he said, noting that Rituxan and Herceptin "some doctors have begun calling vitamin K and vitamin H. They're obviously a great strength."
Herceptin (trastuzumab) is for HER-2 positive metastatic breast cancer.
Rituxan (rituximab) is for relapsed or refractory low-grade or follicular, CD20-positive, B-cell, non-Hodgkin's lymphoma.
Genentech officials, Berger said, "have taken good care of their core franchises, such as human growth hormone, and there they've got an alliance with Alkermes. That's clearly an exciting name they're working with. They can consistently grow at 30 percent and deliver a great news flow in the years ahead."
Alkermes Inc. was named by Jason Kantor as his top choice for its "superior drug delivery technology and, importantly, its lower-risk business model," which involves making sustained-release formulations of existing drugs such as Risperdal, an anti-psychotic for which a new drug application is expected later this year.
"A single good product can transform a company," Kantor said, but "the problem with [the single-drug] business model is the risk" which Alkermes has found a way to avoid, although it also has Nutropin Depot (somatropin) for growth hormone deficiency.
"The atypical anti-psychotic market is a multibillion-dollar market, and we believe the sustained-release formulations could address 15 [percent] to 20 percent of that market," Kantor said. "The Phase II data looks good, the drug is well described, and we think this is going to be a good year for Alkermes."
Robert Olan chose Aurora Biosciences Corp.
"We upgraded this one this morning," Olan said Thursday. "Our reason is the potential of something called 'big biology,' which is the company's internal drug discovery effort."
Aurora will supplement its access program to drug screening, which has won business from about 20 pharmaceutical and biotechnology customers, with applications of the technology by the company itself, Olan said.
The company has quantified its spending, "which has the near-term effect of pulling down earnings from positive 34 cents to break-even," causing shareholders who are "near-term sensitive" to sell, he said.
But Olan predicted the value will rise again "as more is known about 'big biology.'"
Maged Shenouda cheered Medarex Inc., forecasting more success as monoclonal antibodies make a resurgence.
"The stock has come down of late, significantly over the last month or so, and I expect this to turn around over the next year or so, based on news news from the company itself regarding new collaborations and existing collaborations moving through the development cycle," Shenouda said.
Ronald Renaud cautioned against too much skepticism, saying that "there are in fact solid prospects." His choice was Invitrogen Corp., "far and away the global leader in supplying scientists with critical kits, reagents and supplies" the market for which will only grow, Renaud said.
Corey Davis, in the specialty pharmaceutical group, said Alza Corp. has proven itself admirably, and will keep on doing so.
"In 2001, you can either bet on products or you can bet on management," Davis said. "If you want to bet on management, the choice there has got to be Alza." He said leaders of the company have "done a fantastic job. [Wall Street] is asking what's next, and I think they're going to deliver it." *