An Upside to the Biotech Blues

With drug approvals picking up and the likihood of higher earnings not too far down the road, there are bargains in this beaten-down sector

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.


  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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