A Surprising Safe Haven

By Jennifer Schonberger

Sean Murphy, a 36-year-old marketer who lives in Washington, D.C., thought he was staring at a death sentence when he was diagnosed with lymphoma almost two years ago. Today, with the help of two Amgen drugs that boosted his immune system while he was undergoing chemotherapy, Murphy is cancer-free.

Although stories of miraculous cures have long been at the heart of the biotech sector's allure, great science hasn't always translated into great returns. But during the past year, it was biotech stocks that produced a small miracle. In 2008 through November 7, the Dow Jones U.S. Biotechnology Index gained 2%, while Standard & Poor's 500-stock index tumbled 37%.

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Market dynamics, as much as laboratory innovations, explain the sector's relatively strong performance. For starters, biotechs can be safe havens in turbulent times. "Biotech companies have relatively stable earnings that are not dependent on broader economic factors," says Rajiv Kaul, manager of Fidelity Select Biotechnology fund. Just as important, the companies are as far removed from the turmoil of Wall Street as figure skating is from football.

A flurry of deal activity is also fueling interest in the group. In October, U.S. drug giant Eli Lilly offered $6.5 billion for ImClone. Last July, Switzerland's Roche bid $44 billion for the 44% of Genentech that it didn't already own.

Over the long term, it's all about new products. Investors look for biotech companies to invent cures for a wide variety of ailments, ranging from diabetes to various types of cancers. Biotechs are also expected to produce replacements for the large number of traditionally produced drugs that will lose patent protection over the next few years.

Investing in biotech can be risky. Many companies fail long before they ever bring a product to market. In looking for winners, focus on companies that are working on drugs with large market potential. The four firms below have strong pipelines of new products that could generate big future sales.

Huge winner. One of the industry's great success stories, Celgene develops drugs to treat various types of cancer. Analysts expected that sales, which were less than $4 million in 1998, would approach $2.2 billion for 2008 and that the company, which turned profitable in 2003, would earn about $705 million, or $1.55 per share, for the year. At $60, the stock (symbol CELG) is up 200-fold from its 1998 low (all prices are as of the November 7 close).

Celgene's best-known drug is Revlimid, which is used to combat multiple myeloma, a cancer of the blood-plasma cell. The drug is now being tested as a possible treatment for lymphocytic leukemia and non-Hodgkin lymphoma. Moreover, Celgene is making a strong push to sell Revlimid in new European markets (the company already sells the drug in nearly 75% of developed European markets) and has plans to launch in Canada and Australia as well. Sales of Revlimid surged 72% in the third quarter of 2008, to $342.6 million, and Value Line Investment Survey predicts that the figure could exceed $3 billion within three to five years.

Celgene's other big seller is Thalomid. (As thalidomide, the drug was associated with severe birth defects in the late 1950s.) Like Revlimid, it is a treatment for myeloma. Celgene also has big hopes for expanded sales of Vidaza -- which entered Celgene's portfolio with the company's $2.9-billion acquisition of Pharmion last March -- a drug to treat bone-marrow cancer.

The stock isn't cheap. It sells for 26 times the average analyst estimate for 2009 of $2.30 per share. But if Celgene can deliver the 38% annual earnings growth that analysts are projecting over the next few years, today's share price will look like a bargain.

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Amgen is a turnaround story. Its reputation was tarnished by findings that its blockbuster anemia drugs, Aranesp and Epogen, did more harm than good in chemical studies on cancer patients who were being treated for low red-blood-cell levels. But Amgen is on the verge of reinvigorating its earnings growth with several potentially lucrative new drugs.

The company has high hopes for Denosumab, a treatment for osteoporosis in women who are past menopause. In recent late-stage testing, the drug was found to reduce spinal fractures by 68% among such women. Value Line estimates that the market for the drug could exceed $500 million per year.

Another drug with big potential is Nplate, which is designed to boost platelets in patients with a rare blood disorder. Morningstar believes sales of Nplate, which won approval from the Food and Drug Administration in August, could approach $1 billion a year. Amgen's other major products are Enbrel, a treatment for rheumatoid arthritis and psoriasis, and Sensipar, for patients with renal disease.

Boring performance. Although Amgen's stock (AMGN), at $59, advanced 27% in 2008, it has been as dull as aspirin for most of this decade. The company, which raised its earnings outlook in both July and October, says it expected to earn $4.45 to $4.55 per share in 2008, up about 5% from 2007. Analysts see the company earning $4.69 per share in 2009 and, on average, expect long-term earnings growth of 9% per year (although Yaron Werber, a Citigroup analyst, thinks the new products could boost the growth rate).

Genzyme, which specializes in developing drugs to combat rare genetic diseases, faces little competition. About half of its revenues, expected to have reached $4.6 billion in 2008, come from four drugs that target such disorders as Gaucher disease, a genetic enzyme deficiency. Sales from this segment have grown 18% annually since 2000.

The company has a number of promising new drugs in the pipeline. Genzyme anticipates approval of six new products or updates to existing products over the next 12 months, as well as authorization of additional production capacity for Myozyme (a treatment for Pompe disease, which interferes with muscle development) in the U.S. and in Belgium next year. Genzyme believes the increased production capacity for Myozyme could catapult its sales, which totaled $201 million in 2007, beyond the $1-billion mark by mid 2009.

Genzyme expected FDA approval in late 2008 for Mozobil, which helps patients with lymphoma or multiple myeloma receive successful stem-cell transplants. In addition, the New England Journal of Medicine recently reported that Campath, a drug already approved for the treatment of leukemia, shows potential for reversing multiple sclerosis.

The company is on a financial roll. It has met or exceeded analysts' earnings estimates in ten of the past 12 quarters. Analysts expected Genzyme to earn $3.98 per share in 2008, an increase of 128% from 2007, and the company itself predicts profits of $4.70 a share in 2009 and $7 by 2011, for a 20% annual growth rate. The company has no debt and holds $1.5 billion in cash. At $70, the stock (GENZ) trades at 15 times '09 earnings forecasts.

Thanks to the work of companies such as Gilead Sciences, people with HIV can live normal lives for years. Gilead derived 81% of its estimated 2008 revenues of $5.3 billion from drugs used to treat HIV, says analyst Jason Zhang, of BMO Capital Markets. When it comes to usefulness and safety, he says, Gilead's HIV line is the best on the market.

Reaching out. But Gilead is trying to diversify beyond HIV products. The company has won approval in the U.S., Canada and the European Union to market Viread, its biggest-selling HIV drug, as a treatment for chronic hepatitis B. In May, Gilead acquired cicletanine, a compound with the potential to treat high blood pressure in the pulmonary artery, from Navitas. The FDA recently deemed cicletanine to be an "orphan drug," one that treats relatively few people. That gives Gilead exclusive rights to produce the drug for seven years. Also in trials is darusentan, a product for high blood pressure that generally doesn't respond to other medicines. Darusentan could win FDA approval in 2009.

Gilead, which turned profitable in 2002, was expected to earn $5.2 billion, or $2.04 per share, in 2008. Analysts expect earnings of $2.37 per share in 2009 on revenues of $6.3 billion and see profits climbing at an annual pace of 17% over the next three to five years. At $45, the stock (GILD), which sells for 19 times 2009 earnings forecasts, was off 2% in 2008.