Large-cap biotech stocks are better positioned to bring investors returns during the second half of 2008 due to revenue gains and development deals, J.P. Morgan analysts said Tuesday.
Industry giants including Genentech Inc., Celgene Corp. and Gilead Sciences Inc. are poised to continue outperforming the broader market and their smaller peers because of increasing product sales, analyst Geoffrey Meacham said. He urged investors to remain selective with smallcap and midcap stocks by focusing on companies with near-term catalysts, such as regulatory decisions or the release of anticipated study data.
"Looking at performance during the first half of 2008, large caps have indeed acted as a relative safe haven," he said, noting that J.P. Morgan's biotech index has gained 8.5 percent since January, versus declines in the broader market.
During the second half of the year, he expects greater revenue growth throughout the large-caps, driven by the "three horseman" _ including Genentech, Celgene and Gilead. Meanwhile, a tight capital funding environment and apparent lack of catalysts could weigh on smaller biotech stocks.
"Absent a turnaround of the broader economy, traditional sector catalysts such as unexpected M&A activity or meaningful phase III clinical data do not appear now to improve sentiment toward the biotech group," Meacham said.
South San Francisco, Calif.-based Genentech remains one of his top picks, with shares up nearly 10 percent year to date. Meacham said the stock could pop if interim results on key cancer drug Avastin from a colon cancer study are positive.
Sales of cancer drug Revlimid will continue driving revenue of Summit, N.J.-based Celgene, he said, commenting that estimates seem low both near- and long-term. Celgene shares are up 29 percent for the year.
Foster City, Calif.-based Gilead, meanwhile, is up 18 percent for the year as it continues dominating the HIV treatment market.
Silver Spring, Md.-based United Therapeutics Corp., which is down 4 percent for the year, remains a top small-to midcap pick based on its potential for the inhaled version of its pulmonary arterial hypertension treatment Remodulin.
Though down 37 percent for the year, Danbury, Conn.-based Biodel Inc. has been on the upswing since March based on the outlook for its experimental VIAject treatment, which is an ultra rapid acting injectable insulin. Meacham expects study data to further push shares higher.
Lehman Brothers analyst Dr. Jim Birchenough, meanwhile, maintains his view that large-cap stocks are a good investment, but that there are more growth opportunities in the midcap section of the sector.
"Ultimately we continue to favor midcap growth opportunities into the second half of 2008 with improving earnings visibility, greater pipeline catalysts and potential strategic value to larger acquirers," he said in a note to investors Monday.
His top picks also include United Therapeutics, but he counts San Diego-based Amylin Pharmaceuticals and Frazer, Pa.-based Cephalon among the best growth stocks because of their key products.
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