Thursday, July 10, 2008

Sexy Biotechs

For the past two days we've been judging best of breed among the drug sector. Tuesday's lineup included the Wholesale/Distributors and Generic drug makers. We found several decent plays but there was little else that warranted more than a passing yawn. The excitement quotient picked up yesterday with some attractive candidates lurking in the Ethical Drug industry (Big Pharma), and today's contest portends to be even better because on tap is the sexiest group of them all, the Biotechs.

The Lineup
There are hundreds of companies in the Biotech group ranging in size from micro- to large-cap with an estimated majority falling near the lower end of the scale. I looked at the chart of every single one and am happy to report that the most attractive stocks were found among the large-caps, although I did find a couple of decent small-cap stocks and one micro-cap. Okay, enough of the introduction and on with the show.

The Beauty Queens
Winning in all departments (including the much-dreaded talent portion of the beauty contest) are the following:
Illumina (ILMN): 5000% is how much this stock has gained in the past five years. But is it too pricey now that it's trading just under $90? Maybe. It's P/E ratio is catching up to its growth rate. For now, the company is slightly undervalued but it won't be if the price goes much higher. However, the company said recently that it expects second quarter profit of 37 to 40 cents per share, topping the 28 cents expected by analysts. Perhaps this good news is being priced into the stock...? All I know is that the Chicken Little in me would wait until after their next earnings announcement on July 22nd before deciding whether or not to jump in.
Celgene (CELG): This stock took a tumble along with the rest of the market last October. It bottomed out in December (earlier than most) and has been rising steadily since. Poor drug trials by a competitive product have helped the company's bottom line. At $71/share, it's closing in on its all-time high of $75 and change. I'd look to buy it here. Note that an analyst at Jeffries just raised company EPS estimates as well as the target price from $77 to $81 per share.
Techne (TECH): This company develops, manufactures, and markets instruments and other products for use in biotechnology and hematology world-wide. It's revenue, earnings per share (EPS), and EPS growth rate have been increasing steadily along with its share price. The deca-levels ($10 levels) seem to form resistance for the stock. It cleared the $70 hurdle a couple of months ago and is now looking to take-out the $80 level. If it does that on volume conviction, I'd be a buyer. Earnings aren't until Aug.5, but if it reports much better than expected results like it did on April 29th, you could see the stock leap well over the $80 mark, if it hasn't surpassed it by then.
Emergent Biosolution (EBS): This is one of the small-cap companies I mentioned above. It develops and manufactures vaccines for a wide variety of applications including anthrax, an agent of bioterrorism. The stock plummeted from a high of $17.75 to under $5 last December. It dug itself out of the trench and is now trading at $12. The company is currently involved in a he-said-she-said type of lawsuit which doesn't seem to be affecting the stock price. A good entry point would be a bounce off its 50dma. Earnings will be reported later in August.
Savient Pharmaceuticals (SVNT): Since 1995, this stock has steadily risen from under $2 to a high of over $28 per share. It's now trading about a buck below the high; breaking that level would be a bullish sign. It's gout treatment posted positive phase III clinical trial results which sent Wall Street pundits into takeover speculation mode as this treatment has dollar signs written all over it. (See my note below regarding takeovers in this sector.) The company has not announced the date of its next earnings release but if it's like years past, it'll be somewhere late in July or early in August.
CombiMatrix (CBMX): This may be the smallest of the companies promulgated here, but it wins the bathing suit contest hands-down. The company fabricates material arrays, including DNA microarrays, which are used in a variety of applications. It is also involved in biodefense and nanomaterials development. Can this company stuff a wild bikini or what?! Although its sales are comparatively small, its growth rate has been enormous. It was recently added to the Russell Microcap Index. The stock is having a tough time staying above $11 and if it can do that, I'll be a buyer. Earnings are scheduled for late July or early August. Also, please keep in mind that the average daily volume on this stock is only 20,000 shares, so use limit orders when entering trades.

The Runners Up
Here's a list of more good companies that didn't quite make the grade, either because they're trading off their highs or are in the process of recovery. For one reason or another, their charts weren't as compelling as the ones above. You'll have to do your own research on these since I don't have the time nor the space, but for what it's worth, the MSN Stock Scouter gave them all an 8 (out of 10) which is very good and my investment software rated them all a “Buy" except for Gilead and Martek which were rated as “Holds.” In no particular order, here are the runners up: Myriad Genetics (MYGN), Martek Biosciences (MATK), Gilead Sciences (GILD), ViroPharma (VPHM), Onyx Pharmaceuticals (ONXX), and Alexion Pharmaceuticals (ALXN). Genzyme (GENZ) almost made the cut but I'm not quite sure if the stock's current rally is for real or just a head-fake. I'd like to see it break its $82 high first. As a consolation prize it's awarded Miss Congeniality.

Summary
Well, now you've got a nice list of drug stocks to add to your buy list. One thing I noticed in my perusal of this sector is the inordinate number of recent takeovers. Considering the large quantity of companies in this sector, it's not unreasonaable to expect a certain amount of consolidation, what with many of the major drug developers cutting costs as their key revenue drivers lose patent protection and face stiff competition from generic equivalents. With increasingly lackluster offerings, big pharma is turning to biotechs to help them beef-up their product pipelines. Of course, one could always play the take-over game by trying to identify those companies prime for the picking, but considering the sheer number of drug stocks in the micro-cap universe, that seems almost as impossible as pushing an elephant through a keyhole.

Frankly, I can think of better things to do.

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