Biotechs are back: The Amex Biotech Index has soared 20% since Apr. 1, after floundering for much of the year. Small-cap Scios (SCIO) has been swept upward, too. And with good reason: The company is about to introduce one of the first new drugs in a decade for acute congestive heart failure, says Rachel Leheny of Lehman Brothers. Even though the disease afflicts 5 million Americans a year, current treatments are "suboptimal," she says. Leheny views Scios' Natrecor as a blockbuster. The Sunnyvale (Calif.) company looks to Natrecor to pump up revenues by a modest $14 million this year and by $72 million in 2002.
The Food & Drug Administration's initial rejection of Natrecor in April, 1999, had been depressing the stock. Scios traded at a 52-week-low of about $3 in May, 2000, but climbed to $30.50 last month, before sliding to $26. Leheny tags Scios a "strong buy," with a $38, 12-month target. In April, another analyst, Needham's Dr. Mark Monane, raised his yearend target to $37.
An FDA committee will review Natrecor on May 25 and give it a nod or a nix by mid-July. The company and analysts are optimistic. Meanwhile, Scios will lose money as it beefs up for the hoped-for rollout. The net loss was $1.15 a share last year, and Leheny expects a $1.39 loss in 2001--vs. First Call's consensus of a $1.47 loss. Monane projects Scios will earn 50 cents a share by December, 2003, and $1.90 by 2004, when he estimates sales of Natrecor will reach $219 million. Scios is not a one-trick pony, however: Analysts say trials of SCIO-469, a treatment for rheumatoid arthritis, look promising. Research pacts with Chiron and Eli Lilly will help fill the pipeline. Although corporate info-tech spending has fallen off a cliff, Quest Software (QSFT) is hanging tough. Its products help companies monitor B2B networks. Quest announced record results for the first quarter ended Mar. 31: revenues of $63 million, up 120% from a year ago and up 13% from the prior quarter. Earnings of 6 cents a share surprised Wall Street and catapulted the stock, trading at a 52-week low of $14.60 on Apr. 4, to its current $35--admittedly a far cry from the $97.50 it hit before the tech wreck. Quest still commands a pretty premium, but Ed Bierdeman of Moors & Cabot Tech Research Group says Quest deserves special valuation: "It's young, and it's growing 100%-plus in revenues," he says. Bierdeman has raised his earnings estimates to 30 cents a share this year and 47 cents in 2002. His 12-month price target: $60.
Quest's revenues stem from license sales and maintenance fees. And, adds Morgan Stanley Dean Witter's Joseph Farley, its product line is "crowding out the competition"--namely NetIQ and Precise Software Solutions. Since its 1999 initial public offering, Quest has gobbled up firms to grow. Still owned 69% by insiders, it has other things going for it, says Farley: a strong balance sheet and widening operating margins. For a virtual test drive of their products, General Motors, Lockheed Martin, and NASA look to MSC.Software (MNS). MSC's simulation software lets companies digitally stress-test designs for products such as cars and rockets before manufacturing begins. Now, MSC has created versions of its software to make it accessible to companies that have smaller, more mundane products--and that want to get to market faster. It has signed up Cooper Tire, Medtronics, and Cleveland Golf, which is using the simulation software to test new clubs. MSC is "expanding by taking a product loved by engineers to the mainstream," says Daniel Bandi, co-manager of the $580 million Armada Small-Cap Value Fund. Bandi holds a 2% stake in MSC. On May 22, MSC hit a 52-week high of $18.85. Bandi's yearend target is $30.
Other forces could push the stock higher, says Bandi, such as perhaps joining the Russell 2000 on June 30. The company may also be buyout bait, says Bandi. In May, France's Dassault Systemes traded its 19% stake in an IT group, Advanced Enterprise Solutions (AES), for 9% of MSC. (MSC had acquired AES on Apr. 24.) Bandi says a Dassault takeover has been rumored for "several years," but the stakes are higher now. Merrill Lynch's Jay Vleeschhouwer is bullish on the stock, but skeptical about the takeover. For 2001, he sees revenues of $201.7 million, up 13%, and earnings of $1 a share, up 36%. He adds, though, that if buying AES boosts MSC's profits as much as it has suggested, "the current price could turn out to be conservative."