Pharma looks strong, biotechs mixed in 2008

NEW YORK (CNNMoney.com) -- Big Pharma, fueled by promising pipelines and cost-cutting, is poised for a strong 2008, analysts say, while projections are mixed for the biotech sector.

Pharmaceutical companies with up-and-coming blockbuster drugs and multi-billion-dollar restructuring plans have the winning combination to boost their earnings and their stock next year, analysts say.

Chris Schott, analyst for Bank of America, said in a published note that he is bullish on Big Pharma for 2008 because "near-term cost-cutting combined with a longer-term pipeline recovery will drive continued earnings upside."

Merck & Co's (MRK, Fortune 500) stock has had a very good year, with a 36 percent gain year-to-date. Schott remains bullish on the stock and projects a 10 percent jump in Merck's stock over the next 12 months, fueled by continued enthusiasm in the sales growth of relatively new products like the diabetes drug Januvia and the cervical cancer vaccine Gardasil.

Schott also projects a dramatic jump of more than 25 percent for Pfizer Inc. (PFE, Fortune 500) and an increase of more than one-third for Wyeth (WYE, Fortune 500). The stock for both of these companies dropped about 10 percent so far this year. But Schott believes that the Food and Drug Administration will approved Pristiq, Wyeth's experimental antidepressant in 2008, giving that company a boost.

Schott said that investors have "an overly pessimistic view on the company's longer-term pipeline prospects," because he believes that cost-cutting and a dividend increase will lift the company's stock.

But views on Pfizer are more mixed. Les Funtleyder, analyst for Miller Tabak, said that Pfizer's lackluster pipeline could hurt the company next year, despite its aggressive cost-cutting measures.

A drug company's experimental products - its pipeline - serves as the most reliable gauge for projecting future sales. This is particularly important in the pharmaceutical industry, where drugmakers scramble to come up with new blockbusters, to replace the old drugs as their patents expire. Weak pipelines leave them vulnerable to competition from low-cost generics.

"The pharma story is a case of the haves and have-nots," said Funtleyder. "Those domestic companies with strong pipelines or new products, like Merck, Bristol and Schering, did well. Those with limited pipelines, like Pfizer, Lilly and Wyeth, have not done as well."

The pipeline issue will be increasingly important in 2008.

Through most of 2007, stock for both the pharma and biotech industries had been gaining at about 4 percent, until a recent downturn pushed biotech into the red, according to Thomson Financial's Baseline.

This biotech downturn comes from a triple-whammy in the industry, says Funtleyder: An FDA advisory panel rejection of the Genentech (DNA) drug Avastin as a breast cancer treatment, Biogen Idec's (BIIB) inability to find a buyer, and Amgen's (AMGN, Fortune 500) ongoing safety issues with its top-selling Epogen-Aranesp anemia treatments.

Unfortunately for the industry leaders, analysts don't see things getting much better next year. As an industry, biotechs have matured. The largest biotechs are now plagued by the same problem that has dogged the pharmaceutical industry in recent years: pipeline weakness.

Amgen could have a potential winner with its experimental bone disease drug denosumab, but that isn't expected to enter the market until 2010. Joel Sendek, analyst for Lazard, rates Amgen a "sell" and projects a mild slip in stock over the next 12 months.

Sendek projects a still-bullish jump in valuation for Genentech. But his $85 price target is lower than what it used to be. The analyst slashed the 12-month price target from $100 following a negative vote from FDA advisers regarding Avastin's use as a breast cancer drug.

"In the biotech industry, the bellwether companies - Amgen and Genentech - are facing some headwinds," said Assail Vital, analyst for Atlantic Equities. "They need to have more products in the pipeline. I think the growth in this sector is primarily coming from the small caps."

But while biotech's biggest players are suffering a dearth of new products, the small and mid-sized biotechs, like Genzyme (GENZ) and Gilead (GILD), have a brighter future, analysts say.

Philip Nadeau, analyst for Cowen & Co., rates both of these companies a "buy," and believes that their existing brands will continue to drive up stock price, sales and earnings into 2008.

Both of these companies are having a good run on the stock market, with a more than 40 percent surge for Gilead year-to-date, and a jump of more than 20 percent for Genzyme.

Genzyme has built a good business model selling the world's most expensive drugs - Cerezyme, Fabrazyme and Myozyme - as "orphans," or treatments for rare diseases.

Gilead, producer of the AIDS combo drug Atripla, is poised to replace Glaxo SmithKline as the industry leader for HIV treatment.

Looking at Baseline projections for 2008, earnings and valuation for the pharmaceutical and biotech industries are similar. Identical earnings growth rates of 10 percent are expected for each industry, with a price/earnings ratio of 16.7 for biotech and 14.1 for pharma. Baseline does not break out industry-wide stock price projections.

Despite the similarities, the volatile investing climate favors Big Pharma because it's seen as "safer" than biotech, said Funtleyder.

"People are going to prefer dividends and safety, versus no dividends and higher multiples," said Funtleyder. "In a choppy market, the movement is going to be to pharma, and those who have strong pipelines will do better than those who do not."