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Historically, the biotech industry has been less impacted by market conditions due to its unique characteristics. In large part, biotech stocks have been event-driven. Specifically, investors are more focused on clinical development and pipeline advancement for individual biotech companies.
However, current market conditions have exerted a negative impact on the valuation of individual companies in the biotech industry. We believe the different impact current market conditions have exerted is mainly due to the credit crunch.
Most biotech companies are in early or middle development stages, and continuing financing is an integral part of their operations in order to advance their drug pipelines. Under current market conditions, liquidity has dried up for some companies, and raising capital has been extremely difficult in the past few months. Some companies are forced to enter into survival mode to reserve cash by restructuring. Some even have to suspend operations or file for bankruptcy.
Based on our belief that this time the biotech industry is more negatively affected by the current credit crunch rather than the economic slowdown, we do see opportunities existing for some biotech companies. In this broad, undifferentiated, beaten-down market, we believe companies with less financing pressure may benefit from the recovery of the broad market.
Specifically, companies with strong balance sheets and low cash burn rates, and/or with approved products on the market, will survive amid the current bleak economic conditions. At this point, "cash is king" is the single most important factor in evaluating a biotech company, especially a smaller one.
With the above criteria in mind, our top picks for the biotech industry are BioMarin Pharmaceutical Inc. (BMRN - Analyst Report), Regeneron Pharmaceuticals Inc. (REGN - Analyst Report), Onyx Pharmaceuticals Inc. , 3SBio Inc. , AMAG Pharmaceuticals Inc. (AMAG - Snapshot Report) and American Oriental Bioengineering Inc. .
Recently, we have seen increased numbers of biotech companies that are forced to suspend operations or file for bankruptcy due to cash shortages. It is extremely difficult to raise any additional capital due to the current credit crunch and economic downturn. Therefore, we try to avoid companies with great financing pressure in the next 6 to 12 months.
These names include Genta Inc. , Dynavax Technologies (DVAX - Snapshot Report), Cell Therapeutics Inc. (CTIC), Decode Genetics (DCGN) and Anadys Pharmaceutics Inc. (ANDS). All these tiny biotech firms have great pressure for further financing in the next 6 months, and they have entered into survival mode in order to save cash since it's almost impossible for them to raise additional funds anytime soon.
We are also negative on MannKind Corp. (MNKD - Analyst Report) and Trimeris . Our Sell call on MNKD is based on our general negative view on the inhaled insulin segment. Investors should also stay away from TRMS. The company has only one product, Fuzeon, on the market -- with sharply declining sales in recent quarters due to fierce competition. Its pipeline is also weak. We don't see any huge upside potential in the next few quarters, even when the broad market recovers from its current downturn.