Biotech Industry

With no sign of stabilization any time soon for current financial and economic conditions, the biotech industry will be divided in the early part of 2009. We believe companies with strong balance sheets and low cash-burn rates will survive. Companies with high cash-burn rates and financing needs in the next 6 to 12 months will suffer, and may not survive the current economic downturn.

Most biotech companies are in early to middle stages of development, and continuing financing is an integral part of their operations. With liquidity drying up, capital raising will be very difficult in the next 6 to 12 months. Recently we have seen increased number of small biotech companies which are forced to enter into a survival mode to reserve cash, forced to suspend operations or file for bankruptcy.

We expect the M&A spree will continue in 2009. While licensing has been the lifeline for biotech industry, we believe big pharma and giant biotech companies are more willing to swallow small biotech companies with very low valuations in current market conditions.

The market environment in the pharma/biotech industry is favorable for the M&A activity. However, big pharma and biotech companies still face three major challenges: patent expiration, low research and development productivity, and generic competition from companies sitting on a pile of cash reserves. Acquisition will solve at least part of these problems.

OPPORTUNITIES

Our top picks for biotech industry include BioMarin Pharmaceutical Inc. (BMRN - Analyst Report), Onyx Pharmaceuticals Inc. (ONXX - Analyst Report), Celgene Corp. (CELG - Analyst Report) and AMAG Pharmaceuticals Inc. (AMAG - Snapshot Report). All of the four companies have strong balance sheets, which eliminates immediate financing needs.

BMRN is among the few companies who specialize in enzyme replacement therapies. The company already has three FDA-approved products on the market and has become profitable in the first three quarters of 2008. EPS growth during the 2008-2011 period should be 192%. The company also has a decent pipeline. Cash position is also strong with $563 million as of September 30, 2008. BMRN is also a potential buyout target by Genzyme (GENZ - Analyst Report) or Shire PLC (SHPGY - Snapshot Report). Our 6-12 month price target is $28.

ONXX is an oncology company which is developing and marketing Nexavar for various cancer indications. Nexavar has been approved for kidney cancer and liver cancer. Nexavar sales have remained strong in 3Q08, and the drug should continue its momentum in the coming quarters. With profits at its back, ONXX recently in-licensed two cancer drug programs -- BGC945 from BTG International Limited, and JAK2 inhibitors, SB1518 and SB1578 from Singapore’s S*Bio -- while continuing to expand Nexavar labels. With a cash balance of $488 million and no debt as of September 30, 2008, ONXX is well positioned for long-term growth. The company is also cooperating with Bayer for Nexavar, which makes it a potential and meaningful buyout target by Bayer. Our 6-12 month price target is $45.

CELG is a fully integrated biotechnology company focused on oncology and hematology. The acquisition of Pharmion brings three medically meaningful products -- Thalomid, Revlimid and Vidaza -- into market, which will drive growth in 2009 and beyond. The MDS market will be dominated by Celgene with complementary Vidaza and Revlimid, although Revlimid and Thalomid face tough competition in the MM [multiple myeloma] market. Also, strong balance sheet and deep pipeline will provide long-term growth for the company. Our price target is $70. The company has a strong balance sheet. As of September 30, 2008, Celgene held $2.5 billion in cash and marketable securities and no long-term debt.

AMAG develops superparamagnetic iron oxide nanoparticles for use in pharmaceutical products. The company’s focus is on developing IV iron replacement therapy for anemia in chronic kidney disease and imaging agent to aid in diagnosis. The company filed the NDA for its lead drug, Ferumoxytol, in December 2007, and we expect the FDA approval to come in 1H09. AMAG is not profitable yet, but with Ferumoxytol approval at its fingertips, the company should enjoy strong growth in the coming years. Its balance sheet is strong. As of September 30, 2008, the company had $241 million in cash, cash equivalents and investments and no long-term debt. Our price target is $55.

WEAKNESSES

As opposite to our top picks, we try to avoid companies with weak balance sheets. We have seen increased numbers of biotech companies who have failed due to cash shortage recently. 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. (GNTA), Cell Therapeutics Inc. (CTIC - Analyst Report) and Decode Genetics (DCGN - Analyst Report). All of these tiny biotech firms have great pressure for further financing in the next 6 to 12 months, and they have entered into a 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 (TRMS - Analyst Report). 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.