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An Upside to the Biotech Blues

By Frank DiLorenzo Biotech stocks have been beaten down recently due to drug-development setbacks at some companies. The S&P Biotech index is testing the lows of September, 2001, and has fallen 16.3% year-to-date through Apr. 30, vs. a 4.8% decline in the S&P 1500 Super Composite index.

The recent selloff has been indiscriminate as investors reassess the proper valuation for the group. Even good companies with positive news have sold off to a point of undervaluation.

The weakness in biotech stocks comes at a time when fundamentals are improving as more drugs win approval. There have already been three major new drug approvals -- for Neulasta, Rebif, and Zevalin -- this year. Two major supplemental approvals, for Botox and Enbrel, were also recently handed down. Last year at this time, there was only one major approval (for PEG-Intron), which came in April, 2001.

LONG-TERM GROWTH. We estimate the average 4-year annualized EPS growth rate (from 2001 through 2005) for biotech companies is 24%, about three times the historic rate of earnings growth for companies in the S&P 500 index. Once investors recognize the earnings power for biotechs, we think money will flow back to the group.

On a net present value analysis of products and pipelines, S&P has a 5-STARS (buy) recommendation on Amgen (AMGN), Cephalon (CEPH), and Genzyme (GENZ).

We have a 4-STARS (accumulate) recommendation on Celgene (CELG), Genentech (DNA), Enzon (ENZN), IDEC Pharmaceuticals (IDPH), Immunex (IMNX), and Medimmune (MEDI). Analyst DiLorenzo follows biotechnology stocks for Standard & Poor's

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