Where the Biotech Bets Are

John McCamant of The Medical Technology Stock Letter tells where he's making his in this poorly performing sector

The next blockbuster drugs will come from biotechnology companies, not the pharmaceutical giants -- and their strength will be attacking diseases at the source, believes John T. McCamant, editor of The Medical Technology Stock Letter.

Acknowledging that biotech has been a poor performer so far this year, McCamant still thinks some biotech stocks have great promise. His comments came in a chat presented on June 6 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Edited excerpts from this chat follow. A complete transcript of this chat is available from BusinessWeek Online on AOL, keyword: BW Talk.

Q: Can you give us your professional overview of this disconcerting market?


We're in a post-bubble environment, and I find it difficult to figure out exactly where things are myself. However, when I look back to March, 2000, and remember some of the excesses of the dot-coms and genomics stocks, which were both extremely overvalued with no business model...we've learned that it's a pendulum.... We overswung on the high side, and it has become extremely difficult to predict where we're going to swing on the low side.

Combine this with international crises or potential crises and the accounting scandals, and I think we've shaken the faith of the individual investor. But one thing we're comfortable with, long-term, is new pharmaceutical development. And we believe biotechnology companies represent the bulk of that opportunity.

Q: How has the biotech group performed through all this unpleasantness?


Post-September 11, it was one of the best-performing groups through December. However, a combination of negative events has made it a very poor performer since the start of the year.

Q: The ImClone (IMCL ) news hasn't helped. What do you make of investors' reaction to the company's management change and drug trials for [its cancer drug] Erbitux?


It has been basically one negative development after another. Management is out, so it's important to distance the drug and the company from any of the problems with management. And I think...because this is a cancer drug...the Food & Drug Administration will continue its interactions with the company based on the drug's merits and quality of the clinical trials, not the previous management's ongoing problems.

Q: What are your favorite small-cap biotechs that have good early-stage [Phase 2 and 3] results that don't need any cash to get their products to market?


There are a few. Cell Genesys (CEGE ) has over $350 million in assets, Phase 2 and Phase 3 cancer-vaccine trials by yearend, all product rights retained, a seasoned oncologist for a CEO, and the stock sells for its hard assets. You get the technology for free -- a cutting-edge cancer vaccine.

Q: What's your opinion of Biogen (BGEN ) for the long term?


Biogen is the world leader in multiple sclerosis [treatment] through Avonex, which is a billion-dollar drug now [Biogen announced June 7 that Avonex sales were slowing and would affect its earnings this year], and it recently received a positive FDA panel for a psoriasis drug, Ameive. This will be its second product, and psoriasis [market] is a large market that [has been underserved by] the pharmaceutical industry.

Ameive would be a poster child for what biotech can deliver, which is the ability to address the underlying disease at its source -- in this case, T cells. This drug represents why we believe biotech, not Big Pharma -- is going to deliver the innovative blockbuster drugs.

Q: What criteria should investors apply to picking biotech stocks?


Three basics. The first is products or science. The second is management. The third is cash. And if there was one emphasis that I would remind readers of, very often it's that good management will find a way to get it done.

Q: Do you have any views on mutual funds as a vehicle for people who want a stake in biotech but want to diversify?


Mutual funds are an excellent way to provide a window to biotech opportunity investing. However, the vast majority of funds, even with good track records, don't have the managers currently with them who achieved those track records. So do your homework -- check those things closely.

Q: Is Immunogen (IMGN ) a good stock to hold, or should I sell?


Immunogen is one of our recommended companies. It has a powerful technology that attaches potent poisons to monoclonal antibodies. Most antibodies don't actually kill cells -- they usually just block receptors, which has provided efficacy. But it's believed that by attaching the poison to the antibody, you can significantly increase the efficacy of the antibodies. Management has done a good job of leveraging the technology into partnerships while retaining product rights for their shareholders.

Q: Do you have any thoughts on the pain-management sector in general?


An expanded use of sustained-release morphines and opiums has provided very good opportunities [in pain-management]. And a company we like a lot, Ligand (LGND ), recently received FDA approval for a once-a-day morphine that has excellent pharmaceutical properties -- i.e., constant drug levels throughout the 24-hour period.

I recommend you take a look at Ligand. In addition to the pain product, it has a deep portfolio of products, including selective estrogen receptor modulators (SERMs). These would replace hormone therapy currently used for post-menopausal women and are multibillion-dollar drug opportunities without the side effects. And because the main side effect of the current drug is cancer, this would be a significant advance.

Q: Are you guys still bullish on Isis Pharmaceuticals (ISIS )?


Yes. The company recently did a poorly timed offering to replace debt, but the drugs, partnerships, and cash position remain strong. Isis would be an example of how a relatively small misstep can be punished pretty hard in a tough market. Isis represents a good value today.

Q: How much of a portfolio should represent a bet on biotech, assuming a fairly long time horizon?


Roughly 25%, as a long-term health-care play with significant diversification two ways. We'd want you to own at least 10 different companies, spread among the three tiers. For instance, a couple of profitable biotech companies and a couple of the small-caps, balanced with four or five of the mid-caps. That will provide you good exposure with good diversification over the long term -- 10-plus years.

Edited by Jack Dierdorff

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