Last year, the Biotech industry as a whole achieved much better performance than the market. Both the NASDAQ Biotech Index and AMEX Biotech Index outperformed all three major market indices (Dow Jones Industrial Average, NASDAQ Composite and S&P 500) in a large margin. The major indices declined as much as 40%. While NASDAQ Biotech Index declined only 12.6%, and AMEX Biotech Index was down 17.7%.
However, when the recession enters into its third year, the Biotech industry is not doing better than the market, which has been evident by the indices' performances. As of April 9, 2009, AMEX Biotech Index declined 3%, and the broader NASDAQ Biotech Index was down 6.8% (AMEX Biotech has 20 biotech companies while NASDAQ Biotech Index includes over 130 component companies). Although the Dow and S&P 500 also declined a similar percentage, technology-laden NASDAQ actually has a gain of 4.8%, which is more comparable to the biotech indices.
This can partly be explained that when the recession gets deeper, even large-cap biotech companies will feel the pinch while the smaller ones are still struggling with survival. The recent story with Celgene Corp (CELG) served a good example. Celgene dished out a less-than-expected new guidance for the 1Q09 on March 31, 2009 in a news release related to a conference presentation due to challenges from the global economic environment. We may see industry-wide impact in 2009.
Valuation is attractive, though. The industry’s average P/E (trailing 12-month) ratio has declined to 16x from its historical 35x to 40x. The five-year PEG ratio is less than 1 at 0.96 according to Yahoo Finance.
We continue to expect M&A spree in the remainder of the year. Recent mega deals include the acquisition of Wyeth (WYE) by Pfizer (PFE), the acquisition of Schering-Plough Corp (SGP) by Merck & Co. (MRK) and the acquisition of Genentech (DNA) by Swiss drug maker Roche. Also, on March 12, Gilead Science (GILD) announced it will buy CV Therapeutics (CVTX) for $1.4 billion, exceeding Japan’s Astellas’ proposed offering price of $1 billion.
We believe the current market environment in the pharma/biotech industry is favorable for M&A activity. Big pharma and biotech companies still face three major challenges: patent expiration, low research and development productivity, and generic competition.
With very active M&As in the pharma/biotech sector, investors have every reason to speculate on buyout targets. Opportunities also exist in companies with decent pipelines that may attract big pharma or biotech companies for partnerships.
We continue to have BUY rating on Myriad Genetics (MYGN), Onyx Pharmaceuticals Inc. (ONXX) and AMAG Pharmaceuticals Inc. (AMAG). All three companies have strong balance sheets, which eliminate immediate financing needs.
MYGN is a biopharmaceutical company that focuses on the development of molecular diagnostic and therapeutic products. The company’s molecular diagnostics business has been very strong and continued to grow impressively in the fiscal second quarter of 2009 ended December 31, 2008, and the outlook is bright even in the current economic environment. We expect another strong quarter coming out early next month. Our price target is $53.
ONXX is an oncology company developing and marketing Nexavar for various cancer indications. Nexavar has been approved for kidney cancer and liver cancer, and sales remained strong in 4Q08 and will continue its momentum in the coming quarters. With profits at its back, ONXX recently in-licensed two cancer drug programs, BGC945 from BTG International Limited, and JAK2 inhibitors SB1518 and SB1578 from Singapore’s S*Bio, while continues to expand Nexavar labels. With a cash balance of $458 million and no debt as of December 31, 2008, ONXX is well positioned for long-term growth. The company is also cooperating with Bayer for Nexavar, which makes it a potential and meaningful buyout target by Bayer. Our price target is $45.
AMAG develops superparamagnetic iron oxide nanoparticles for use in pharmaceutical products. The company’s focus is on developing IV iron replacement therapy for anemia in chronic kidney disease and imaging agents to aid in diagnosis. The company filed the NDA for its lead drug, Ferumoxytol, in December 2007, and we expect FDA approval to come in the middle of 2009.
AMAG is not profitable yet, but with Ferumoxytol approval at its fingertips, the company should enjoy strong growth in the coming years. its balance sheet is strong. As of December 31, 2008, the company had $215 million in cash, cash equivalents and investments and no long-term debt. Our price target is $55.
We also have a Buy rating on 3SBio Inc. (SSRX). SSRX is a integrated, China-based biotech company focused on developing and marketing therapeutics for nephrology, oncology and cancer supportive care. The company’s flagship product, EPIAO, is the number 1 brand in China EPO market. Its second lead product, TPIAO, has gained rapid physician acceptance for thrombocytopenia, and is making a meaningful contribution to the company’s top-line growth. A recent deal with US-based AMAG Pharmaceuticals Inc. will boost its expansion into IV Iron market. Our price target is $10.
We suggest investors avoid small biotech firms with weak balance sheets — particularly those which need immediate financing. Even with a promising pipeline, these small biotech firms may suspend operations and may be forced into survival mode without immediate new funds until current financial market and economic situation improve.
We continue to suggest investors to avoid Genta Inc. (GNTA), Cell Therapeutics Inc. (CTIC), Decode Genetics (DCGN) and Cyclacel (CYCC). All these tiny biotech firms have great pressure for further financing in the next 6 to 12 months, and they have entered into survival mode in order to save cash.
In addition, we continue to be negative on SurModics Inc. (SRDX), Alkermes (ALKS) and Celera Group (CRA). The recession has finally taken a toll on both top lines and bottom lines of these companies.
For ALKS, termination of recent two deals with Eli Lilly (LLY) and Cephalon (CEPH) for the inhaled insulin program and Vivitrol, respectively, have major negative impact on the company’s top-line growth. Sales growth of Risperdal Consta, from which Alkermes generates manufacturing and royalty revenue and which is the biggest revenue contributor, has been diminishing in the last three fiscal quarters of 2009, and will continue to decline due to heavy competition in the schizophrenia market.
Exenatide LAR approval may be delayed by the FDA due to the pancreatitis found in patients on Byetta therapy, and by the FDA's concern over a study that indicated Novo Nordisk’s (NVO) Liraglutide might trigger thyroid cancer tumors in rodents. Both liraglutide and exenatide belong to the same class of drugs called GLP-1s. So far, according to data from both preclinical and clinical studies, we think Exenatide LAR may have a better safety profile than liraglutide, but we are not sure if the FDA will exert tough rule on the safety concerns of Exenatide.
Exenatide LAR is the company’s only late-development program after the termination of the AIR Insulin program. Our price target is $8.
Our Sell rating has not changed for SRDX and CRA.
Our Sell call on SRDX is based on the lackluster financial performance of fiscal 1Q09 ended December 31, 2008 and bleak outlook for 2009 due to current financial and economic conditions. With the current financial and economic environment, coupled with the termination of the Merck agreement and expiration of the Abbott agreement, we expect a decline in both revenue and earnings per share in the rest of fiscal 2009. Total revenue for fiscal 2009 will be down 3% compared with fiscal 2008. EPS for 2009 will be $0.71 per share compared to $$1.13 per share for 2008.
In the case of CRA, we also see a worse-than-expected calendar fourth quarter 2008 financial performance. We are deeply concerned about the company’s outlook for 2009. In the fourth quarter news release, management of Celera provided guidance for 2009 which was well below our expectations. The company expects revenue in 2009 to be in the range of $192 to 202 million, versus our estimate of $227.5 million. The company expects non-GAAP EPS in the middle single digit versus our double digit EPS for 2009.