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New Products Could Make This a Good Year for Biotech

March 03, 1998|TOM PETRUNO

As a group, biotechnology stocks have mostly been treading water for the last two years. But many of the industry's fans insist that 1998 will be a breakout year for the business and for the shares.

"We are convinced that 1998 will be an excellent year for biotech stocks," said Jim McCamant, writing in his biweekly Medical Technology Stock Letter ($320 per year; [510] 843-1857) in Berkeley.

Two months into the year, however, biotech investors still are waiting--at least judging by the performance of the American Stock Exchange biotech index, which tracks 15 stocks, including Amgen Inc., Cephalon Inc. and Chiron Corp.

The Amex index closed at 158.07 on Monday, which leaves it down 2.7% year-to-date. The Nasdaq composite index, by contrast, has soared 12% so far this year, lifted by big gains in major computer-related stocks.

For the Record
Los Angeles Times Wednesday March 4, 1998 Home Edition Business Part D Page 3 Financial Desk 1 inches; 20 words Type of Material: Correction
Analyst--Wall Street biotech analyst Alex To has moved to Deutsche Morgan Grenfell. His firm was identified incorrectly in a story on Tuesday.

The glory days for biotech investors were in 1991, when the Amex index tripled, fueled in part by the success of Thousand Oaks-based Amgen and other industry leaders. But the stocks, as a group, then went into a long decline as numerous expected drug breakthroughs failed to materialize in the early 1990s.

The industry surged anew in 1995, but since then has again badly trailed the return of the stock market overall.

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Why should that change in 1998? Alex To, analyst at Donaldson, Lufkin & Jenrette Securities in New York, sees this year as a "turning point" for the biotech business. If all goes well, To says, Wall Street will see "a wave of new product introductions" from the industry in 1998.

"Potentially, over 20 new biotech products could hit the market in the next 12 to 18 months," the analyst said in a recent report to clients. "To put this in historical perspective, this is about the sum total of all biotech products developed by the industry in its 25 years of existence.

"In other words, the biotech industry is acquiring critical mass," To says.

The big question, of course, is whether all or even most of those proposed new products will make it through the Food and Drug Administration approval process.

For investors who want to bet that the surprises will be positive rather than negative, McCamant likes such stocks as Isis Corp. (ticker symbol: ISIP), which is developing a drug to treat retinitis; ImClone Systems (IMCL), which is testing cancer-treatment drugs; Somatogen (SMTG) and Agouron Pharmaceuticals (AGPH).

DLJ's To has been recommending such stocks as Chiron (CHIR), AgriBioTech Inc. (ABTX) and Biogen Inc. (BGEN).

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What about Amgen (AMGN), which has long been making big profits while most biotech firms still are bleeding red ink?

In a recent report, Prudential Securities analyst Caroline Copithorne warned that sales of both of the company's drugs, anti-anemia treatment Epogen and white-blood-cell stimulator Neupogen, fell short of expectations in the fourth quarter.

The rap on Amgen has long been that demand for Epogen and Neupogen is tapering off and that the company's new-product pipeline simply doesn't have enough in it. Copithorne believes that "the company's next big product may be almost two years away."

Those worries have helped pull Amgen stock, now $52.41 on Nasdaq, down 25% from its 52-week high of $69.56.

Bullish on Builders: Analysts Peter Dannenbaum and Adam Weiner at Morgan Stanley Dean Witter recently told clients what most Californians probably have sensed for a while. "We believe the long-awaited turnaround in the California housing market is now firmly in hand," the two wrote in a research report.

They noted that existing home sales and median home prices in California both increased at double-digit rates in December versus a year earlier, the first time that has occurred in this decade.

For investors looking to play the housing recovery, the Morgan analysts have a few suggestions.

They believe that builder Lennar Corp. (LEN) "stands to benefit most" from the California market's strength, as sales in the state will account for more than 40% of the company's revenues this year. The analysts estimate that Lennar, which last year bought builder Pacific Greystone, will earn $1.90 a share this year and $2.20 next year, for 16% growth.

They also like another builder, MDC Holdings (MDC), whose California backlog at year's end was nearly 70% above year-earlier levels. MDC is the largest builder in Riverside County.

Finally, Dannenbaum and Weiner favor Southdown Inc. (SDW), noting that the cement company's biggest plant is located in Victorville.

Briefly: The odds that your stock mutual fund is beating the blue-chip Standard & Poor's 500 index this year aren't great, but they're a lot better than last year. Through last Thursday, 27% of general U.S. stock funds were beating the S&P's 8.3% year-to-date total return, according to fund-tracker Lipper Analytical Services in New York. By contrast, in 1997 just 10.3% of general U.S. funds beat the S&P's 33.4% return. . . .

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