Positive surprise in the biotech sector

In this difficult environment the good performance of the biotech sector is one of the very few positive surprises. The Johnson & Johnson’s acquisition of the biotech company Scios has drawn the investor’s attention to this sector.

Fernando Luque 17.03.2003
Investor sentiment

From the beginning of the year (as of the 12th March 2003) the MSCI World Index Pharmaceuticals fell an 8,9%. In dollar terms a slightly better performance than the whole market (the MSCI World Index dropped a 10,3% also in dollar terms). But during this same period the MSCI World Index Biotechnology surprisingly registered a gain of 4,9%.

There are several reasons explaining the relative good performance of the biotech companies during these last weeks. First the North American giant Johnson & Johnson announced in early February the acquisition for 2.4 billion dollars of Scios, a biotech company whose flagship product is Natrecor (for cardiovascular treatment). Scios climbed an impressive 33% during February.

But that has not been the only movement in the sector. A few days ago ImClone, another biotech company, received a 60 million dollars cash payment from Bristol-Myers to develop an experimental cancer drug named Erbitux.


Outlook

Biotech companies are again drawing the attention of the investors. Prospects for the sector looks appealing. The big pharmaceutical companies have an urgent need to launch new drugs on the market (as they are gradually loosing some patent protections and facing the increasing competition from the generic companies) and one way of getting these new products is by the acquisition of biotech labs.

So it is very likely that the healthcare sector will experience more M&A activity in the short term and that this trend will be favourable to the biotech stocks. However the impact on the big pharmaceutical is more uncertain.

Another positive point for the biotech companies are the new product approvals from the North American Food & Drug Administration (FDA). Last year, for example, no more than 20 new products were approved by this regulatory agency (which operated without a president from mid 2001 to late 2002). In the first two months of this year 5 or 6 new drugs have already received the FDA approval.

According to the Swiss fund company Pictet all the big biotech labs have the intention to commercialise at least one new drug during this year. But in a report dated from January Merrill Lynch commented that “although there should be more than 10 new biotech products launched in 2003 we believe that few will represent major advances in medical care” and that “a lot of phase III clinical data (*) could have high-risk implications”. They expect biotech stocks to remain in a trading range during 2003.

The sector is undoubtedly a risky bet. The biotech funds have been very volatile, are very volatile and will be very volatile. It is in the proper nature of this infant industry. The case of the mentioned ImClone is a good example. The stock gained 44% during February but there is no guarantee that the Erbitux will be approved by the regulatory authorities.

(*) Note from the author: The Phase III is the last stage of clinical trials before the drug receive the approval from the FDA.

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Fernando Luque

Fernando Luque  es el Senior Financial Editor de www.morningstar.es