Which Midsized Biotech Is the Best Buy?

If Goldilocks were an investor, she'd invest in mid-sized drugmakers -- because they're juuuust right. Companies in the $10 billion to $50 billion market-cap range provide the perfect balance of volatility and growth.

They're not dependent on one drug approval for their success, like development-stage drugmakers; one pipeline failure won't kill the company's stock. But there's still potential for substantial growth, compared to large pharmaceutical companies that need multiple drug approvals to move the revenue needle.

Source: Capital IQ, a division of Standard & Poor's.

Which one's the best buy?
They all look tempting in their own individual ways to me. Celgene's P/E is a little high, but it's still much lower than where it's been. Genzyme looks the most expensive, but that's only because of the horrible year it's had. The company is trading at 18 times forward earnings; assuming it can actually turn things around, that's more in the ballpark of reasonable.

Gilead, Amgen, and Biogen look even cheaper, especially compared to their historical growth rates. Obviously, the future depends greatly on the success of their pipelines, and the recently approved drugs each company is nurturing. Here's a look at what each biotech needs to do to justify a buy rating.

Gilead
The most important drug in Gilead's pipeline is its quad-drug HIV cocktail, which entered phase 3 trials in April. Investors will have to wait a while before the results are available -- dosing is scheduled to last for 96 weeks -- but the findings should be worth it. The phase 2 data looked pretty good, and the quad should help Gilead lower its reliance on Atripla, a drug that produces less income for Gilead, since it has to share the revenue with co-developer Bristol-Myers Squibb (NYSE: BMY).

In the longer term, though, Gilead has to diversify away from HIV. Its heart drugs have been a mixed bag, but perhaps a new push into drug discovery can give its pipeline a boost.

Amgen
The future of Amgen depends squarely on its bone drug denosumab. The drug is already approved as a treatment for osteoporosis under the brand name Prolia, but it'll have a hard time competing against well-established players, especially because drugs such as Merck's (NYSE: MRK) Fosamax already have cheap generics available.

The real growth story for denosumab lies in its ability to treat cancer patients whose tumors have moved to the bone. The expanded indication is currently under review, with an approval looking like a slam dunk. The drug beat the current bone drug for cancer patients, Novartis' (NYSE: NVS) Zometa, in multiple trials.

The biggest test for denosumab -- its ability to inhibit tumors metastasizing to the bone -- is yet to come. If the phase 3 trials come up positive, expect Amgen to skyrocket.

Biogen Idec
The drugmaker has a few pipeline candidates that could result in some nice growth, but its already-approved multiple sclerosis drug Tysabri is just as important. The drug, which Biogen sells with Elan, recently topped $1 billion per year in revenue, but its sales growth has slowed in recent quarters.

In order to reaccelerate growth, Biogen and Elan have to figure out a way to make patients feel safer about Tysabri's potentially deadly side effect, progressive multifocal leukoencephalopathy (PML). The companies are working on a way to treat the brain infection, and developing a test to help determine whether a patient is susceptible to PML in the first place. If those efforts succeed, both should help boost Tysabri sales from blockbuster to mega-blockbuster status.

Pick one
You really can't go wrong with any of the three, given their cheap valuations. But Amgen seems to harbor the greatest near-term promise. Assuming it lives up to its potential, denosumab should be enough to get Amgen out of the funk it's been in over the last few years.