There are only a small handful of large, profitable biotech companies. Names like Amgen (NASDAQ:AMGN), Biogen Idec (NASDAQ:BIIB), Chiron (NASDAQ:CHIR), Genentech (NYSE:DNA), Genzyme (NASDAQ:GENZ), Gilead Sciences (NASDAQ:GILD), and MedImmune (NASDAQ:MEDI) immediately come to mind.

It is unfortunate that only rarely can we look to this group for a good bargain. These are high-growth companies, and they carry the lofty P/E and PEG values that tend to come with fast growers. When their multiples come down, it is often a sign that something is amiss -- and that low-P/E biotech may not be much of a bargain.

One of the big bios that has fallen low enough to have me sniffing around is MedImmune. The stock has been awful recently, down 41% from its high of the past 12 months. While the stock was briefly at these depths during the Big Biotech Bear of 2002, the company's $6 billion market cap is essentially what the company was worth back in 1999. Since MedImmune has more than a billion dollars in sales and a blockbuster drug in Synagis, my interest in the company is piqued at this market cap. Let's take a look.

What's wrong with MedImmune?
Aside from one of the most disastrous product launches in recent memory, not much is awry if you don't mind a few years of stagnant profits while the pipeline matures. Synagis is a stellar though aging product, and FluMist isn't going to be able to deliver the growth the company was counting on when it made the expensive acquisition of Aviron back in 2002. (For additional thoughts on the FluMist debacle, check out these articles by Fool Alyce Lomax: MedImmune Under the Weather and Worries for Wyeth.)

Diluted earnings per share (EPS) for 2003 was $0.72, giving a trailing P/E of 34. That's not too bad for a biotech. However, the forward picture is not as rosy, with guidance for EPS of $0.50 to $0.60. That results in a forward P/E range of 42 to 49. The company doesn't look cheap in that light. Even worse for near-term earnings would be the departure of Wyeth (NYSE:WYE) from the FluMist partnership. Wyeth currently bears the bulk of the research and development (R&D) costs, and if it decides to cut its losses, MedImmune's EPS will be cut by $0.10 to $0.20 as its R&D expenditures increase.

The numbers alone only present a partial picture. Drug development can be a feast-or-famine type of business, so I think choppy earnings are expected. If the earnings weakness is temporary, that doesn't mean the company is necessarily a bad investment, as long as the drug pipeline is sound.

The drug pipeline and future growth
Numax (the next-generation version of Synagis) is one of the most important drugs in development, despite the fact that it only recently entered clinical trials. In pre-clinical studies, it is 50 to 100 times more potent. If this potency translates to superior efficacy in clinical trials, MedImmune will replace Synagis with Numax.

Now why would a biotech company deliberately kill off one of the best-selling drugs in the industry? MedImmune is paying Abbott Laboratories (NYSE:ABT) a truckload of money to market and distribute Synagis. Synagis sales totaled $849 million in 2003. In a recent conference call, management stated that the company paid Abbott approximately $250 million. Ouch. Money, meet match and his best friend, gasoline.

MedImmune has retained all of the rights to Numax, and it does not have such a marketing arrangement in place for this drug. If I assume that Numax completely cannibalizes Synagis sales, which is management's stated goal, the bulk of that $250 million paid to Abbott is instead going to fall to MedImmune's bottom line. With an anticipated launch in 2007 or 2008, that makes longer-term earnings look significantly better.

In addition to Numax, MedImmune will have three additional drugs in phase 3 clinical trials next year. This includes CAIV-T (refrigerated FluMist), Vitaxin, and a human papilloma virus (HPV) vaccine that is being developed by partner GlaxoSmithKline (NYSE:GSK). Of these, Vitaxin is the most promising, given the wide range of large indications -- such as psoriasis, rheumatoid arthritis, and several cancers -- for which the drug is currently in phase 2 trials. The HPV vaccine is being developed for the prevention of cervical cancer, where it will be competing with a highly publicized product from Merck (NYSE:MRK). This is also an interesting drug, as the majority of cervical cancer cases appear to be from HPV infections.

To go along with the four late-stage drugs, MedImmune is also stocking its pipeline with new early stage drugs. The company is going to put three new drugs into clinical trials each year through 2006. This is a good sign that the company is committed to investing in a robust drug pipeline.

MedImmune has hit a lull in earnings growth, and the stock has suffered for it. Unfortunately, the earnings picture could certainly get worse before it gets better if Wyeth abandons the FluMist partnership. MedImmune is committed to spending $400 million to develop CAIV-T over the coming years, and such significant R&D expenditures will be a drag on earnings. This is especially damaging to the company's valuation until it can convince the market that this is money wisely spent. At this point, I'm not sure this product deserves the benefit of the doubt, though some of the phase 3 data on this formulation suggests it may be a worthwhile endeavor in the end.

While the pipeline has some interesting products in development, it will be at least three years before any of these drugs reach the market. In the interim, revenue and earnings growth is going to have to come from existing products. Right now it looks like annual growth in the ballpark of 10% is to be expected. A P/E around 40 is a bit steep for that kind of growth. For the short term, I don't think the stock is incredibly cheap, especially if MedImmune has to pay for all of the CAIV-T trials without Wyeth.

For a longer-term focus of at least four to five years, there could be some value here. The drug development fundamentals appear solid, and I think it is clear that the pipeline drugs are not yet priced into the stock. In the current biotech environment, that is certainly a rarity. If any one of the four later-stage drug candidates turns out to be a winner, then the company will likely resume growth at a robust pace.

Charly Travers is this month's guest analyst in Motley Fool Hidden Gems.Get your free trial now.

Travers does not own shares of any of the companies mentioned in this article. The Fool has an investor-friendly disclosure policy.