Biotech Booms And Busts We picked five biotech stocks last year. One tripled. One cratered.
(MONEY Magazine) – When we last wrote about biotech stocks back in May 2000, we warned that they have a gut-wrenching "tendency to boom, then bust." Sure enough, the sector has since plunged, soared, then plunged again. Overall, the American Stock Exchange biotech index, which surged 101% from January to March 2000, has since tumbled 26%. In retrospect, we were right to caution that many biotech stocks had "flown too far too fast."
These days, though, a lot of biotech stocks trade at less giddy levels. And the Food and Drug Administration looks poised to approve a spate of new drugs over the next few months, potentially giving the sector another rush of adrenaline. It's an opportune time, then, to revisit the five biotech stocks we recommended a year ago.
When it comes to biotech, the sexiest stocks are often crazily overpriced. Last year, for example, we warned against Immunex, which had a dizzying P/E of 223. The stock has since lost more than half its value. By contrast, our best pick was also the cheapest at the time: Pharmaceutical Product Development (PPDI), a clinical research outfit that provides drug-development services to big pharma companies. PPD, which had a P/E of 16 when we picked it, had been mauled after failing to meet earnings expectations. But it's since struck lucrative deals with clients like Eli Lilly, and the stock has raced from $16 to $54. Third Avenue Value's Marty Whitman, who recommended ppd last year, says he's holding on because its "long-term growth prospects look very good." But he doesn't recommend buying at today's prices.
Genzyme General (GENZ) has also done well, spiking up from $49 to $85. The company specializes in drugs for rare conditions like Gaucher disease, which larger pharma firms typically overlook. Genzyme General's P/E has jumped from 24 to 39 in the past year, though it's still cheaper than most leading biotech names. One fear is that a rival drug for Gaucher might appear, but James Fiore of the Life Science Group, a biotech investment firm, doesn't expect this to happen for years. He also likes the company's broad pipeline of drugs in development, including one for Fabry disease.
Amgen (AMGN), the colossus of the industry, has climbed from $60 to $72. The firm recently scored a key victory in a patent lawsuit involving Epogen, an anemia drug that's one of its two bestsellers. (The other is Neupogen, which boosts production of white blood cells.) More good news may be on the way: Amgen's next-generation anemia drug, Aranesp, is likely to win FDA approval this year. "Amgen is going from basically a two-product U.S. firm to a multiproduct global company," says J.P. Morgan analyst David Molowa. The only problem, he says, is that the stock's valuation is "a bit rich." It currently trades at more than 20 times last year's sales vs. a five-year high of 23 times sales and a low of 4.3 times sales.
Applied Biosystems (ABI), which used to be called PE Biosystems, has fared less well, dropping from $97 to $79 since our last story. The company's gene-splicing and DNA-sequencing equipment should sell briskly as the boom in biotech research continues. But with a P/E of 81, the stock is historically pricey, despite its expected long-term growth rate of 20% a year.
Our worst pick was Genentech (DNA), which sells drugs for breast cancer and non-Hodgkin's lymphoma. It crashed from $122 to $56, hit in part by management's warning that growth will slow in 2001. Genentech has a P/E of 92--rich but not outrageous given its unrivaled pipeline. The firm is a leader in the field of monoclonal antibodies, which it is using to develop a psoriasis drug. It is also expected to get FDA approval this year for Xolair, a drug for allergic asthma and rhinitis. For aggressive investors, it may be time to bet on a Genentech rebound. But remember: Even the best biotech stocks may induce heart palpitations.