After 12 months in which the biotech sector underperformed the Dow Jones Eurostoxx 50 by some 29%, ...
After 12 months in which the biotech sector underperformed the Dow Jones Eurostoxx 50 by some 29%, valuations are now approaching attractive levels.
Prolonged underperformance has led to biotech stocks posting the worst total returns of the broader healthcare sector on the back of drug pipeline and cash woes. Jeremy Green, biotech analyst at SchroderSalomonSmithBarney, says the house has recently moved to a neutral stance on the sector, believing the current rate of decline to be unsustainable.
'The European biotech sector was the worst performer within the broader healthcare universe over the last 12 months. This is hardly surprising given the lack of major product approvals, the limited opportunities to raise cash and the number of product failures,' Green notes. 'With many stocks trading at below cash, and the market paying little attention to early-stage pipelines, we believe that in general the bleak outlook is already factored into the current valuations.'
That said, Green is re-entering the market very much on a stock specific basis and has concerns that stocks such as Celltech and Zeltia will struggle to maintain drug pipelines and funding levels. Green says: 'We see no sector-wide catalyst on the near to medium-term horizon that will spark a recovery in the sector's fortunes. We would advise investors to seek out stocks that have visible catalysts over the next 12 months.'
Antony Milford, manager of Framlington Health, is more upbeat about the sector, believing much of the bad news has now been worked through. Milford expects biotech to outperform in the fourth quarter and sees a number of drivers behind a rally in the sector.
'The fourth quarter is traditionally a good period for biotech stocks, with historical returns in this period averaging around 15%,' Milford says. 'Faster drug approvals by the FDA are on the cards now a new commissioner has been selected and we are also expecting more merger and acquisition activity during the fourth quarter, which should help drive share prices higher.'
Milford has largely been upping his weightings in biotech stocks in preference to large multinational pharmaceuticals, which he believes are not benefiting from the economies of scale they can generate and are struggling to push through new drugs to replace those which have fallen off-patent. He now only holds US-giant Pfizer in terms of large-cap pharmaceuticals, having sold out of Johnson & Johnson last month for a profit.
'We are continuing to steer clear of the major pharmaceuticals in the belief that companies such as GlaxoSmithKline are losing out to the generic drug companies and are also suffering from a lack of return on their research and development costs.'
Milford notes: 'We are positive about the biotech sector and are focussing mainly on companies with drugs in the later stages of trials where risks are lower, although we do have some exposure to selected early stage companies.'
Green expects Swiss group, Actelion to reach profitability in the second half of 2003 on the back of a strong launch of its Tracleer product. He also anticipates CAT approaching profitability next year due to healthy sales of its D2E7 product and related royalties.
Milford adds Trimeris is one of his fund's top-performing stocks and is likely to continue that run having received more good news on the trials of Fuzeon, its HIV drug.
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