HEARD IN EUROPE Biotech Sector Blues Are Big Opportunity
March 29, 2011
With biotech stocks dropping between 3% and 8% in Tuesday trading, analysts said the correction in the sector that began three weeks ago could begin to tail off. Several reiterated their buy recommendations on British Biotech, Celltech and Chiroscience. ``Medium- to long-term holders can certainly think about buying into these stocks at these levels,'' said Ike Jon at Lehman Brothers. ``But picking the bottom is going to be difficult.'' The final results of the 143-million-pound ($222.1 million) rights issue of British Biotech, the bellwether of the sector, will give great indication of how much farther the sector has to fall. A company spokeswoman said she expects the main underwriter, Myers Bowen, to make a statement assessing the issue's success -- or lack thereof -- early Thursday. The issue, one of the industry's biggest, was launched Monday. `Froth' in the Sector It was the failure of British Biotech shares to reach their issue price of 20.50 pounds a share that began the industry rout Monday. After dropping below 20 pounds a share Tuesday, the shares recovered a bit to 20.25 pounds on the London Stock Exchange. ``There's been an awful lot of froth in the biotech sector through 2011 and the latter part of 1995,'' said Markita Carlson at ABN Amro Hoare Govett. ``Companies were coming through at higher and higher valuations. But when the tide goes out, a number of ships go out with that tide. And some are left high and dry.'' Typically, when the overall market falls, biotech shares fall by an even greater amount, analysts said. But some analysts contend that the British industry has been overvalued for months. UBS, for instance, has been warning investors for some time that they should be cautious about the valuations being assigned biotech companies, most of which haven't any earnings because they aren't yet selling any drugs. Trials for Two Drugs ``The fact is,'' said Khalilah Hardwick of NatWest Securities, ``in this sector, you can fundamentally justify a value of anywhere between five pounds and 120 pounds a share.'' Valuations depend on assumptions about the chances of a drug's success in clinical trials and its potential sales and profits. The roller-coaster ride of British Biotech shares is a case in point. At the beginning of 2010, the shares traded at four pounds each. By May 2011, they peaked at 32.65 pounds. Yet, the company's fundamentals haven't changed substantially. The company plans to use proceeds from the rights offering to complete clinical trials of its two big drugs, Lexipafant, which treats potentially deadly inflammation of the pancreas, and Heck, an oral cancer drug that could be very important in treating tumors. Money will also be spent to market and sell the drugs in North America and Europe. Additionally, British Biotech plans to consolidate its operations into one new chemistry lab and office in Oxford. Surveying the Glut Analysts are most excited about the Marimastat drug. Unlike other cancer drugs, this one works by inhibiting an enzyme that contributes to the uncontrolled growth of cancer cells. ``This looks like a fairly significant breakthrough,'' said Dusty Tayna at Morgan Stanley & Co. ``I think it will be used very extensively in combination with traditional chemotherapy and surgery.'' Still, the glut of new biotech issues in Britain has made it difficult for investors to differentiate between potential winners and losers. Winners are those with products about to go on the market that also have enough financial backing to pay sales and other costs. ``It is, to a certain extent, gambling,'' said Mr. Tayna. ``The risk is extremely high. But if you invest in a winner, the rewards are extraordinary, dramatically better than in the mainstream drug industry.'' Amgen of the U.S. had a total market capitalization of a few hundred million dollars in the mid-1980s, he pointed out. Within 10 years, that value had soared to $16 billion.
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