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Biotechs may be a good bet for 2006
High-growth companies like Amgen and Genentech are still hot investments. Proceed with caution.
December 21, 2005: 1:23 PM EST
By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - Investors who stuck with their biotech stocks this year are sitting pretty but will the good times roll through 2006?

Biotech companies in the S&P 500 gained 16.2 percent in 2005 compared to an overall gain of 4 percent for the S&P, according to Thomson/Baseline. In comparison, traditional pharmaceutical companies fell about 7 percent.

Investors are certainly willing to pay more for biotechs; they have double the price-earnings ratio of more traditional drug makers. So why do biotechs keep attracting the big bucks? Because they can get strong-selling products that will stay on the market for many years, say analysts.

"This isn't hype," said Jason Kantor, analyst for RBC Capital Markets. "This is the real deal with products being sold, with earnings and sales coming in better than expected. What has driven the sector up has been the clinical and commercial success of a whole bunch of products."

Analysts point to Genentech (up $2.19 to $94.26, Research), the second-biggest biotech, as an industry leader. It has three top products: Herceptin, a breast cancer treatment for specific genes; Rituxan, a treatment for non-Hodgkin's lymphoma that has also been submitted to the FDA as a rheumatoid arthritis drug; and Avastin, a treatment for colorectal cancer. Genentech has also conducted late-stage studies with Lucentis for a product that maintains vision in patients with age-related macular degeneration, which affects the retina.

Amgen (up $0.62 to $79.10, Research), the world's largest biotech, is collaborating with Abgenix on a colon cancer drug called panitumumab that showed positive results in early tests. If commercially approved, panitumumab sales could peak at more than $2 billion, according to Amgen. The company also recently offered to purchase Abgenix for $2.2 billion.

"These companies are flush with new products and provide the best of confidence that the growth rate is sustainable," said Eric Schmidt, analyst for SG Cowen. "Compare that with the pharm space, where growth is single digits at best."

Biotech investors are also unfazed by patent expirations, which often dog traditional drug companies when they start to compete against generic offerings. Biotech products are all relatively new. The specter of patent expiration is still decades away, say analysts.

About $21 billion worth of name-brand drugs will lose their patents in 2006, according to an estimate from Andrew Forman, analyst for WR Hambrecht & Co. And a total of $100 billion will go off patent over the next five years.

Biotechs are "less mature" than Big Pharma, says SG Cowen's Schmidt. There isn't "a clear path to biotech generics," he adds

But analysts warn against buying biotech stocks without considering the risks of the industry. They are beholden to the same governmental regulatory scrutiny as Big Pharma.

Hanzhong Li, analyst for Suntrust Robinson Humphrey, said that biotech investors should have a high "risk tolerance."

"Biotech is a volatile sector," said Li. "It's mostly clinical-data driven, and the biotechs have an equal chance of failing a trial than showing positive data."

To see how Big Pharma did in 2005, click here.  Top of page

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