With positive news on the potential for Genentech's (NYSE: DNA) Avastin to treat colorectal cancer, its shares jumped 70% in six days to close at $63.85 yesterday, in a move not seen since late 2000.
The recombinant DNA pioneer, today the leading monoclonal antibody company by the number of those drugs on the market and in development, sports a market capitalization greater than that of Schering-Plough (NYSE: SGP).
Take that, big pharma!
In fact, ever since I wrote Profit in the Biotech Bust two months ago, companies using biotechnology to make drugs or advance the drug development process have exploded.
The AMEX Biotech Index and Nasdaq Biotech Index (AMEX: IBB) have far outstripped the S&P 500 and Nasdaq since March 12 lows:
3/12/03 5/27/03 % Change
AMEX Biotech Index 312.25 456.24 46%
Nasdaq Biotech Index 47.05 67.50 43%
Nasdaq Composite 1279.23 1556.59 18%
S&P 500 804.19 951.48 22%
This is proof again, as if any were needed, that in the short term the market is driven by herd responses to news, the big wind that blows in from Winnetka, and tea leaves. Anything having to do with biotech -- regardless of the individual business -- has benefited.
That's great if you're a short-term trader or -- like the majority of actively managed stock mutual funds (biotech or other) -- turning over your portfolio at a fast clip each year. But they remind me of a money manager friend whose clients come to her most often after bad experiences with the large Wall Street brokerage firms, and one in particular. She quips, "Ah, yes, Morgan Stanley Dean Witter (NYSE: MWD). 'Impoverishing investors one at a time.'"
If you are an individual investor looking for companies whose business model you can understand and whose growth sells at a reasonable price, you want companies growing free cash flow and selling for less an enterprise-to-free cash flow multiple less than that. You may calculate a company's intrinsic value (IV) based on discounted cash flow and try to buy below its IV. More ambitiously, you may calculate its return on invested capital (ROIC) and compare that to its weighted average cost of capital (the discount rate used in your discounted cash flow analysis). Phew.
According to these various valuation measures, three companies recently scored well: QLT (Nasdaq: QLTI), Ligand Pharmaceuticals (Nasdaq: LGND), and Meridian Bioscience (Nasdaq: VIVO), which you can find, respectively, in A Quick Double?, A Painkilling Double, and Diagnosing a New Prospect. (I own all three, by the way, putting money where my mouth is.) And on the informed speculation side, Jeff Fischer (TMF Jeff) provides his recent take on positive developments at Millennium Pharmaceuticals (Nasdaq: MLNM).
This is how we look at investing -- business strength and valuation, not today's sailing.
To discuss these and every investing topic with smart friends, join our discussion board Community, voted the best on the Web. Check out this great recent valuation analysis (and look at stock option grants, to boot) for Moody's (NYSE: MCO).
Writer and senior analyst Tom Jacobs (TMF Tom9) contributes regularly on biotechnology and drugs.
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