Investors Catch Biotech Fever

The giants of the field, such as Genentech, are seeing their stocks surge on strong earnings. And analysts see hot prospects for smaller names

On Oct. 10 investors might have been experiencing a little déjà vu. Once again, biotech darling Genentech (DNA) announced a blowout third quarter: Earnings per share jumped 57%, to 33 cents, on sales of $1.45 million -- a 44% increase over the same quarter a year earlier.

Giddy investors pushed the stock up 6.4%, to $87.25, ploughing yet more money into a company that had already seen its shares rise 59.8% since the start of 2005. It's a scene that has been repeated nearly every quarter since mid-2004, when the outfit launched its colon-cancer drug Avastin (see BW Online, 8/25/05, "Cancer Drugs: Therapy for Stocks?").

Analysts expect more good news. Genzyme (GENZ) announced a surprisingly strong quarter on Oct. 18. The world's other biotech giant, Amgen (AMGN), should release strong numbers on Oct. 19: The consensus estimates call for earnings of 82 cents a share on sales of $3.25 billion -- up 28% and 19.9%, respectively, over the same period a year ago.

The recent strong performance of these biotech bellwethers has driven up the entire sector. The Amex Biotech index is up 21.2% this year. And while the biotech rally on Wall Street may well have legs, many experts believe gains will be driven less by the sector's stars and more by its supporting players. In fact, without Genentech and Amgen, the gain on the Amex Biotech index so far this year is a slightly more muted 15.8% -- hinting there may be stocks in the sector that aren't fully valued relative to their near-term prospects (see BW Online, 7/27/05, "Biotech's Growth Spurt Continues").


  Take Gilead Sciences (GILD). On Oct. 18, it announced that revenues for its most recent quarter jumped 51% over the same period a year ago, to $493.5 million. Earnings grew 52%, to $38 per share. The stock has gained 37% so far this year, and was trading around $48 a share as of Oct. 18 -- nearly 28 times next year's expected earnings.

But some analysts believe investors haven't fully realized the potential of Tamiflu, the flu remedy invented by Gilead and marketed by Roche (RHHBY). Gilead gets royalties of about 10% on Tamiflu sales, which could skyrocket as governments around the world begin stockpiling the drug. Fears of an avian flu pandemic could speed up that effort (see BW, 10/24/05, "New Vaccines for a Pandemic"). "[Gilead is] coming to the fore with the recent outbreaks," says Gregory Wade, an analyst for Pacific Growth Equities.

Among the even smaller names that could be poised to take off is Tercica. In September, the U.S. Food & Drug Administration approved Increlex, its drug to treat children who lack a certain hormone that contributes to growth. While it's a tiny niche -- only a few thousand patients qualify to receive the drug -- it could be a gold mine for Tercica. The company hasn't priced the drug yet, but S.G. Cowen & Co. analyst Eric Schmidt is guessing Increlex will sell for about the same price as growth hormone does -- $20,000 a year.

"This could have a market potential of $200 million," Schmidt predicts. The drug is expected to be launched in January, 2005, and could provide a significant boost for the now unprofitable company.


  More investing opportunities might be found among companies that are addressing large unmet medical needs. In an Oct. 5 investing handbook, Merrill Lynch () declares that Alzheimer's disease may be the biggest unmet need yet, representing at $9 billion market opportunity. Axonyx (AXYX), Myriad Genetics (MYGN), and Neurochem (NRMX) are some of the biotechs focusing on that and other neurological disorders.

As for Genentech, it could continue its strong run. The median price target among the 21 analysts who cover the stock is $97. Still, investors looking for the largest growth opportunities in biotech may want to expand their horizons.

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