The biotechnology sector has been performing well on the back of the rebound in the technology area....
The biotechnology sector has been performing well on the back of the rebound in the technology area. New product developments and faster approval of drugs by the US Federal Drug Authority (FDA) has led to growth, and there has been in general positive newsflow in the industry. However, there are concerns by some fund managers the current success will not last indefinitely.
Norman Fidel is manager of the ACM International Health Care at Alliance Capital. He says biotechnology stocks have generally performed in line with Nasdaq-type technology stocks.
Fidel says: "We are overweight in the cardiac and orthopaediatric areas due to new product developments in the area. The baby boomers are now in their 50s and there is a demand for new procedures and products.
"Medical technology over the past 15 years has improved considerably. For example, there has been the mapping of the human genome which will develop gene targets, thereby increasing the number of drug targets for drug development."
According to Fidel, it is the right time for biotechnology. One of the underlying factors responsible for this is that the drug-approval process is getting better. The new US FDA commissioner is promising faster reviews of brand and generic drugs and has followed up with some surprising approvals, a catalyst for better biotech stock performance. For example, 15 new drugs have been approved so far in 2003, versus 17 in total in 2002. Fidel expects the approval of 18 new drugs with over $500m sales potential in 2003 versus 10 in 2002. Biotechnology products that have recently come on the market include a spray/mist flu vaccine without a needle called FluMist by Medimmune/Wyeth; Gleevac for cancer by Norvartis; and Xolair by Genentech for severe allergies. Genentech's Evastin, the colorectal cancer drug that prolongs life, should be approved in coming months.
Paul Clifton, fund manager in global equities at Merrill Lynch Investment Managers, agrees the biotechnology sector has been performing well.
The market has rotated away from safer investments such as bonds into higher-risk growth stocks and has performed well on the back of the rebound in the technology sector.
According to Clifton, the larger companies were the first to perform well. For example, Amgen has had good news flows regarding the approval of anaemia drug Aranesp by the Federal Drug Authority. Amgen is expected to grow at an annual rate of 19% for the next three years. In addition, Genentech has also had good news flows with cancer drug Avastin following successful trial results. The drug is expected to be approved by the FDA later this year.
Other good news flows include the merger between biopharmaceutical company IDEC and immunology, neurobiology and oncology research company Biogen.
In smaller companies there has been a clutch of deals and they have been improving cash flows through royalty agreements.
Framlington thinks valuations in small-cap biotech stocks are attractive. For example, Dov Pharmaceutical seems cheapdue to its potential royalty stream from a product in clinical trials with Neurocrine Biosciences.
Gareth Powell, member of the healthcare team at Framlington, says: "The news flow from the American Society of Clinical Oncology helped sector performance, with many companies benefiting from increased inve-stor focus on oncology products.
"Some important events are expected for the group. This includes a potential approval for a new drug for HIV from Gilead, and data from Biogen for its lead pipeline product antegren in Crohn's. The sector will continue to benefit if longer-term interest rates keep falling, as this will support higher valuations for biotech stocks."
However, MLIM is not particularly bullish on biotechnology. Clifton warns: "We are not certain the biotechnology sector will continue to perform well. In order for this to happen, the good news flows have to continue and there needs to be a market.
"We are looking towards general healthcare, however valuations are still high in this area. Growth has slowed down following the high prices of medicine in the US as opposed to other parts of the world. People who are not covered for drugs have to pay high prices. This has been a debate in the Medicare drug reform."
Clifton also thinks the big companies are not generating enough new products for the sector to keep to its high.
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