Biotech Index Hits New High as Large Firms Gain Steam
Marking the end of a long drought for biotechnology stocks, a key index of the shares surged Monday to a record high, finally topping the old peak reached in 1992.
The 2.9% gain in the Amex biotech stock index, which tracks 15 major stocks, lifted it to 257.63, a smidgen above its previous high of 256.60 reached Jan. 14, 1992.
The 1992 high was reached amid wild speculation about biotech’s future. But many of those hopes collapsed in the early 1990s, dragging most biotech shares sharply lower. Many didn’t begin to recover until 1995 or later.
The index’s rally this year reflects the rising fortunes of the largest companies in the biotech sector--names such as Amgen, Biogen and Immunex, all of which are already profitable.
Amgen shares have jumped 51% year to date, Biogen is up 75% and Immunex is up 88%.
But the resurgence in those companies’ market values hasn’t necessarily carried over to the hundreds of mid- and small-cap firms, many of which are still struggling to raise the money they need to get their products through a long regulatory approval process and to market.
“The market still reflects the focus on the haves and the have-nots,” said Domain Associates general partner James C. Blair.
Of the almost 400 publicly traded biotech companies, only a fraction are benefiting from the favorable market, Blair said.
G. Steven Burrill, chief of merchant bank Burrill & Co., agrees that the success of the top-tier companies has not necessarily helped those below. “I don’t think it is very deep at all,” Burrill said.
However, some analysts see evidence of broadening interest.
Last year, the large-cap companies in the sector gained 80% in value, on average, while the small-cap companies shriveled by a third, according to an analysis by Prudential Securities’ health-care group.
In the first six months of this year, the small- and mid-cap stocks revived. The small caps posted average gains of 6.8%, and the mid-caps rose by 11.1%.
“Last year, if you picked any of the large caps, you were looking pretty good,” said Prudential analyst Caroline Copithorne. “Now there’s a broadening out.”
The Fidelity Biotech mutual fund, for example, is up 23% year to date--and most of that gain has occurred just since April.
In part what’s driven the increased attractiveness of the biotechs has been a series of acquisitions by pharmaceutical giants over the last year, Copithorne said.
Last month, for example, Johnson & Johnson agreed to buy Centocor for about $4.9 billion--a 23% premium over the firm’s market price. And Merck announced Monday that it would buy Sibia Neurosciences for $80 million, or $8.50 a share. That’s 62% more than the stock traded for Friday.
The sector also was given a boost by Roche Holdings’ buyout, then partial spinoff, of biotech powerhouse Genentech. Roche bought the outstanding shares of the South San Francisco company, then put Genentech out to market again while retaining 84% of the stock.
Genentech’s new shares have soared from $97 to $145--an increase of 49% in less than a month.
Another reason for the renewed enthusiasm for biotech is the promise that new drugs under development over the last decade for cancer, arthritis, kidney failure and heart disease are moving closer to market.
Today there are about 80 biotech drugs available in the U.S. But there are hundreds of drugs that are at various stages of clinical trials. As they move closer to regulatory approval, the companies look more attractive to investors and potential pharmaceutical company partners.
The brightening view from the biotech window has dispelled the gloom at the Franklin Biotechnology Discovery Fund. Last fall, portfolio manager Kurt von Emster saw little reason for optimism. He was selling stocks “short” while maintaining a large cash position. But as of May, the fund was fully invested. It’s now up 13.8% for the year--compared with 8% for the Standard & Poor’s 500 index.
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Back in the Spotlight
Major biotech stocks have been roaring this year as investors focus on the rising earnings of the biggest firms and the expected profitability of many others in the years ahead. A sampling of well-known biotech shares, and price-to-earnings (P/E) ratios for profitable firms, based on estimated 1999 earnings per share:
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52-week Monday close Est. ’99 Stock (ticker symbol) high-low and change P/E Amgen (AMGN) $81.38-$28.94 $78.75, +$1.88 41 Biogen (BGEN) 76.63-20.88 72.81, +4.00 54 Cephalon (CEPH) 19.44-3.88 19.19, +0.31 NA Chiron (CHIR) 26.63-13.75 25.69, +0.63 42 Genentech (DNA) 150.00-116.50 145.00, +3.00 NA Gilead Sciences (GILD) 77.63-18.00 75.19, -2.31 NA Immunex (IMNX) 145.88-23.94 118.50, +5.63 208 Medimmune (MEDI) 84.38-21.00 83.25, +3.38 82 Protein Design (PDLI) 29.00-13.38 28.00, +1.44 NA Sugen (SUGN) 30.94-9.75 30.38, +0.69 NA
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NA: Not applicable (loss forecast for period)
Sources: Bloomberg News, Zacks Investment Research (earnings forecasts)
