Biotechs: An Expert Opinion
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Have You Seen This?

 

 

 

Biotechs: An Expert Opinion

 

Bio-tech stalwart Amgen (Nasdaq:AMGN) crushed earnings estimates Monday afternoon (July 28) and raised guidance to boot. The stock was up 4% on Tuesday. Most biotech ETFs were up 1% or so in response.

 

That lends a little credence to my recent discussion, I suppose.

 

The two stocks I mentioned last week have put in a mixed performance. Somanetics Corp (Nasdaq:SMTS) has added $1.50 to $22.58. Emergent Biosciences (NYSE:EBS) is up slightly to $13.00.

 

Of course, it’s only been a week. And a one-week holding period for an individual biotech isn’t enough to make any money unless you’ve got the kind of insider information that, to paraphrase The Steve Miller Band, might get you rich or might get you busted.

 

Besides, my stock-picking machine is optimized for medium-term holding periods – from a couple weeks to a few months. It’s been about a month since biotech and medical device stocks started moving. So there should be plenty of upside to come. 

 

With that in mind, I thought it might be helpful to turn to an expert in the biotech field to get some further insight into what’s driving the biotech rally and how long it might last. And who knows, we may even get a couple stocks too…

 

Biotechs from an Expert

 

My stock picking machine is great at uncovering profitable investments by following money-flows into individual stocks. However, it doesn’t have much to say about monoclonal antibodies or antisense.

 

We recently interviewed Dr. Fariba Ghodsian, Ph.D., MBA to get her views on the biotech sector.  Dr. Ghodsian is currently Chief Investment Officer and Managing Member of DAFNA Capital Management, LLC, a biotech investment fund. Dr Ghodsian previously worked at Roth Capital Partners as Managing Director of Healthcare Research since 1999.  She was a senior biotechnology analyst at Wedbush Morgan, Hancock Institutional, and Lehman Brothers. 

 

In 2002, Dr. Ghodsian was ranked among the top five U.S. biotechnology analysts by the Wall Street Journal. 

 

I don’t know about you, but I have no problem calling her an expert on biotechs. 

 

Biotech Buying

 

Dr. Ghodsian believes that the potential for premium buyouts are one main reason for the strength in biotechs.

 

For one, big pharma’s pipelines are barren of blockbuster drugs and patents on existing drugs are running out. That’s why Pfizer (NYSE:PFE) is trading at a 10-year low. It’s also why Roche just ponied up $44 billion to buy the remaining shares of Genentech (NYSE:DNA).

 

A second factor driving acquisitions is the decline of the dollar. Roche is a Swiss company, so it effectively picks up Genentech on the cheap due to the relative strength of the euro against the U.S. dollar.

 

Thirdly, in the wake of the Vioxx issue, the FDA has gotten a lot tougher in its drug approval process. So if a big pharma is going to partner with, or acquire, a smaller biotech, it makes sense to wait until later Phase trials show some statistical efficacy. It may cost a little more, but it’s also safer.

 

Dr. Ghodsian believes the biotechs are well-positioned to demand favorable terms in both partnerships and buy-outs.  

 

What to Look For

 

Cancer, hepatitis C and diabetes are larger diseases seeing the greatest development. The greatest development in smaller diseases include lupus, immune thrombocytopenia purpura, pulmonary arterial hypertension, cystic fibrosis and pulmonary fibrosis. 

 

Another field Ghodsian sees major developments in is rheumatoid arthritis. “There are major advances with oral drugs in development that would be a great benefit for the patients,” she said. Cardiovascular and gout disease are other areas expected to experience major developments. 

 

Ghodsian likes companies that offer a unique product or a unique way to deliver a drug. Stay away from the “me-too” drugs, where other companies have a similar drug. She also examines the company’s market potential and its chances for success. “Obviously the market size of the drug is important,” Ghodsian notes. “But sometimes companies can thrive very well in very limited markets.”

 

She says the market should be an attractive one where the disease is difficult enough that the insurance companies would be willing to pay a high premium. She points to Genzyme (Nasdaq:GENZ) as an example of that. The biotech company made a billion dollar drug out of orphan diseases by tacking on a high price.

 

It goes without saying that the drug must also demonstrate a favorable safety and efficacy profile to warrant approval. Good management is key to getting the drug to market.

 

Ghodsian also examines the company’s financial resources. “Often time’s biotech companies raise too little money, or are sometimes shortsighted when it comes to financing and I think that bites them in the end,” she said. “So a company that is well financed particularly in this market is important.”

 

Most of the companies in Ghodsian’s universe are not profitable. Some of the companies she invests in are very late stage, while some are more in clinical development. Among specific stocks she favors include, Isis Pharmaceuticals (Nasdaq:ISIS), Rigel Pharmaceuticals (Nasdaq:RIGL) and Pozen (Nasdaq:POZN).

 

Looking Forward

 

My stock-picking machine has churned out a few more promising biotech stocks. Next week, we’ll have a look at those stocks. Plus, I’ll take you inside the electronic brain of the machine so you can get a better understanding of how it consistently pulls up profitable investments.

 

Best Regards,

 

Ian Wyatt

Chief Investment Strategist

Growth Report

 

 

Ian Waytt is the Chief Investment Strategist for the advisory service Growth Report. Growth Report is focused on profitable small-cap companies. For more information, please visit the www.growthreport.com. Ian also writes a free weekly e-letter called Big Idea Investor. You can sign up to get Ian’s weekly commentary here: www.bigideainvestor.com

 





Posted 07-30-2008 2:09 PM by Ian Wyatt
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