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Bullish on Biotech Stocks

Written By Brian Hicks

Posted June 4, 2009



As I wrote in an earlier story entitled, The Brewing Bull Market in Biotech, the fast growing market for new drugs is one “Big Pharma” just can’t keep it hands off of.

The reason for this, of course, is pretty simple. Faced with shrinking pipelines and falling revenues, the old way developing drugs through chemistry alone is giving way to modern technologies such as gene sequencing, protein analysis, and nanotechnology.

In these areas, biotechs dominate.

And the truth is without the cutting edge research and development that the biotechs bring to the table, revenues at the Big Pharma level will likely hit a wall.

So acquiring a small biotech or two is one method the traditional big players have turned to these days to add to their own R&D. 

The examples of this strategy are simply everywhere you look.

In fact, just two weeks ago Johnson and Johnson (JNJ), joined in buying up Cougar Biotechnology (CGRB) for $1 billion in cash. And that was long before the results are known from its two key Phase III trials

Nonetheless, the deal represented only a slight risk to a company the size of JNJ. As giant as they are, that’s not exactly big money.

On the flip side, Cougar’s Phase III trials for a late stage compound to be used in the treatment of prostate cancer could end up being a big winner. Like anything else it’s a risk/reward game.

Then last week, another big player, Sanofi-Aventis (SNY), revealed that it is hooking up with Exelixis (EXEL) in a deal that could be worth more than a billion dollars. And again the deal involved two unproven cancer drugs. In fact, in this case the EXEL candidates are only in early-stage clinical trials.

Naturally, both deals were positive developments for their shareholders. EXEL jumped 30% on the news while, CGRB is rose 27%.

All of which brings us to back to why we’re bullish on biotech. Because let’s face it, in this type of environment someone is going to be next and when the news crosses the wire the share price of those companies will jump much higher.

In that regard, here’s a story I found in Bloomberg today that details the plight of “Big Pharma” and how they plan to beef up sales.

It’s in an article by Trista Kelley entitled: AstraZeneca May Pay Top Dollar to Beat Sales Slump

“AstraZeneca Plc, the most exposed European drugmaker to generic competition, is looking for new medicines as it struggles to beat a sales slump that even its most productive year of development can’t cure.

The London-based company faces cheaper copies of seven drugs by 2014, including its three biggest sellers: Nexium for ulcers, antipsychotic Seroquel and Crestor for cholesterol. Bank of America Corp. analyst Graham Parry downgraded the stock in April to “underperform,” citing a pipeline that isn’t robust enough to fill the looming sales gap.

AstraZeneca trades at about 8.8 times reported earnings, below the 12.7 times for the Bloomberg Europe Pharmaceutical Index. That suggests investors are betting that the company will struggle to combat the generic onslaught to drugs that by 2014 will threaten as much as 62 percent of revenue, according to Bloomberg calculations based on 2008 sales. That unprecedented hurdle may force AstraZeneca to pay top dollar to fill the gap, said Johan Stein, a fund manager at Nordea Asset Management.

“I am wary of their acquisition strategy,” said Stein, whose Stockholm-based firm oversees about $170 billion including AstraZeneca shares. “I’m sure they feel a certain desperation right now. When you are eager to fill the pipeline, there is always a risk you will overpay.”

Chief Executive Officer David Brennan, who bought U.S. vaccine maker MedImmune Inc. for $15.2 billion in 2007, is now seeking smaller deals. Brennan said on March 27 that he will “wait and see” whether the pipeline delivers before reconsidering that stance. He wants to expand in areas including diabetes, pain, infection and cancer.”


Of course, AstraZeneca is just the tip of the iceberg when it comes to lost revenue from generic drugs.  

That’s why all the big companies are sniffing around biotechs these days—especially given how far some of them have fallen.

In short, we’re still bullish on biotech.

Related Articles:

The Brewing Bull Market in Biotech

Pharmaceutical Patent Expirations: Why It’s Time to Buy Biotech Now

The Next Biotech Buyout Candidate?

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