What's Fab in Pharma

Many new products are poised to pay off at last

Thanks to rapid advances in biomedical research, important new drugs and devices are emerging from labs around the globe. After years of lean times, biotech companies are especially hot. Samuel D. Isaly, managing partner at pharmaceutical-fund-management firm OrbiMed Advisors, expects the lineup of profitable biotechnology companies that he tracks to generate annual earnings growth of 20% or so over the next five years. "You've got a group of maturing, profitable companies still growing like gangbusters," he says. "They look like the drug companies did in 1960."

Investors looking for a long-term bet in biotech might be smart to begin with industry leader Amgen (AMGN ). Its flagship anemia drug, Aranesp, is growing quickly, and the company has resolved the manufacturing problems that dampened sales of its rheumatoid-arthritis product Enbrel. While Amgen shares have seen a 34% runup this year, CIBC World Markets (BCM ) analyst Matt Geller figures the stock will move up to a price-earnings ratio of 35, based on estimated 2004 earnings, instead of the current 29. Isaly also likes the stock. "They are growing 20% a year as far as the eye can see," he says.

Some of the smaller biotechs offer interesting plays. One of the best, pros say, is Gilead Sciences. The company has six products on the market -- a healthy number for a biotech company -- notably Viread, an HIV drug. Viren Mehta, who analyzes pharmaceutical companies at researcher Mehta Partners, forecasts that Gilead will post compound annual earnings growth of 37% over the next four years. It trades at a p-e of 33, based on estimated 2004 earnings. Mehta expects the stock, now about 55, to move up to 60 in 12 months.

Investors more interested in shopping the bargain bin should check some of the big pharmaceutical companies. While the stocks were Wall Street darlings in the 1990s, they've been battered by earnings disappointments, patent expirations, and drug pipelines that were slowing to a trickle. Now, stocks such as industry kingpin Pfizer are cheap. Edwin C. Ciskowski, an analyst at Lincoln Equity Management, says Pfizer is trading at 17 times estimated 2004 earnings, a slight discount to the market. Nevertheless, Pfizer should post strong earnings growth over the next few years, thanks in part to the cost savings from its Pharmacia acquisition. "It has the best overall pipeline in the business," Ciskowski argues.

Among lesser-known stocks worth a look is Altana (AAA ) a midsize German company whose American depositary receipts trade on the New York Stock Exchange. It is posting strong sales growth, thanks to its stomach drug, Pantoprazole, sold by Wyeth (WYE ) in the U.S. under the name Protonix. At the same time, Altana has a partnership with Pfizer to develop an asthma drug called Roflumilast that could be rolled out next year or in 2005. Mehta expects the company to generate a four-year compound annual earnings growth rate of 18%. At the same time, he says, the stock is a good value. "It gives us the best of both worlds -- value and growth," he says.

Even better deals can be had in the diagnostic business. Jon M. Fisher, head of equity research at Fifth Third Bank, likes Biosite (BSTE ), which markets a test for congestive heart failure. The test has driven strong growth at the company, despite investors' worries about looming competition for this product from the likes of Bayer (BAY ) and Abbott Laboratories. But Fisher thinks the concerns are overblown and figures the stock, now trading in the 40s, can move into the low 50s over the next year. "They will lose some market share," he says, but not as much as the market is indicating.

A few such picks, and an investor's portfolio could boast some pretty impressive vital signs.

By Amy Barrett

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