The top catalysts pushing many biotech stocks to new highs (BVF, RDY, VRX, MDRX, ISTA, BIOS, NOVN, WPI, CELG, GILD, CEPH, BIIB, AMGN, PFE, MRK, LLY, AZN)

June 25, 2009 · Filed Under General · Comments Off 

Big recent gainers including Biovail Corp. (NYSE: BVF), Dr. Reddy’s Laboratories Ltd. (NYSE: RDY) and Valeant Pharmaceuticals International (NYSE: VRX) are among the biotech names pushing to fresh highs.

But can the broad group continue to push higher in the face of new proposed legislation that threatens to choke profits for managed care providers and many other groups within healthcare?

The list of biotech stocks pushing to their highest levels since at least the same time a year earlier is impressive It includes Allscripts -Misys Healthcare Solution (Nasdaq: MDRX), ArQule Inc (Nasdaq: ARQL) BioScrip Inc. (Nasdaq: BIOS), Ista Pharmaceuticals Inc. (Nasdaq: ISTA), Noven Pharmaceuticals Inc. (Nasdaq: NOVN), and Watson Pharmaceuticals Inc. (NYSE: WPI).

With the exception of select financials that benefit from easy year-ago comparisons, biotech is the fastest-growing industry group. Projected earnings among profitable companies such as Celgene Corp (Nasdaq: CELG), Gilead Sciences Inc. (Nasdaq: GILD), Cephalon Inc. (Nasdaq: CEPH), Biogen Idec Inc. (Nasdaq: BIIB), Genzyme Corp (Nasdaq: GENZ) and Amgen Inc. (Nasdaq: AMGN) in aggregate are expected to rise about 10% in the next 12 months.

Many traders are looking at money-losing, high-beta biotechs, as well, that may show potential to become profitable in the coming years. Now that risk measures including the VIX and T/ED spreads have come down drastically from last year’s peaks, many are hoping to catch the next Genzyme or Celgene early.

Are traders simply paying too much?

Not necessarily. A relative comparison of biotech to other industry groups shows that despite a strong run the group still stacks up favorably based on relative valuation and growth rates. Traders are now paying a multiple of about 13.5x forward earnings for profitable biotechs, which is in line with the multiple of the S&P 500 as a whole.

The difference is that S&P 500 earnings are projected to increase only about 6% over the next 12 months, and many traders are seeking faster growth. 

Catalysts for the biotech industry include potential legislation that may make it easier for companies to produce generic drugs based on live cells, called biosimilars. Part of the Obama Administration’s agenda is to promote biosimilars to bring down drug prices. That may open up a large potential market for existing generic companies, as well as companies like AstraZeneca (NYSE: AZN).

Read related story on biosimilars.

 

And, the ever-increasing pressure for large drug companies like Pfizer Inc. (NYSE: PFE), Merck & Co. (MRK) and Eli Lilly & Co. (NYSE: LLY) to fill their pipelines with the next big blockbuster drug opens the door to potential acquisitions, especially given improvements in market liquidity levels. – Mike Tarsala

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