The S&P 1500 Biotechnology subindustry index recently saw its relative strength ranking move up one notch, from 3 to 4, indicating that its trailing 12-month price performance is now in the top 30% of all subindustry indexes in the S&P 1500 (a ranking of 5 would place it in the top 10%). Year to date through Mar. 28, the S&P Biotechnology index rose 0.8%, vs. a 10.3% decline for the S&P 1500.
During 2007, this subindustry index fell 2.6%, compared with the broader market's climb of 3.6%. Take a look at the accompanying chart. As a reminder, the jagged blue line represents the subindustry index's rolling 52-week price performance as compared with the 52-week performance for the S&P 1500. Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the index's long-term mean relative strength.
There are 10 large-, mid-, and small-cap companies in the S&P 1500 Biotechnology subindustry index covered by S&P equity analysts. Seven stocks have a favorable STARS ranking: Celgene (CELG), Cephalon (CEPH), Gilead Sciences (GILD), PDL BioPharma (PDLI), Regeneron Pharmaceuticals (REGN), and Vertex Pharmaceuticals (VRTX) are each ranked 4 STARS (buy); while Genzyme (GENZ) carries a 5 STARS (strong buy) recommendation.
No Major Catalyst
Steven Silver follows biotechnology issues for S&P Equity Research Services. His fundamental outlook for the biotechnology subindustry is neutral, reflecting S&P's view of a lack of major catalysts for earnings growth over the next 12 months, and higher regulatory and clinical uncertainty weighing on investor sentiment and risk tolerance. S&P sees a conservative and overwhelmed Food & Drug Administration contributing to a slower industry pipeline. Silver sees no immediate impact from legislative pressure for biogeneric drugs and lower drug prices, although he sees the issue gaining momentum as President Bush has requested FDA authority to approve biogenerics in his 2009 budget proposal. Thus, Silver views favorably companies with novel therapies and strong patent protection.
Silver expects long-term M&A trends to remain positive, particularly in drug partnering. S&P sees smaller companies remaining attractive to both Big Pharma and large biotech firms seeking new products and technologies to bolster slowing pipelines and expiring patents. However, Silver believes the environment has been dampened for large-cap deals, as evidenced by Biogen IDEC's (BIIB) inability to find a buyer in late 2007. S&P expects IPO activity in biotechs to remain sporadic. In 2007, most leading biotechs initiated large share buyback programs, leveraging their robust operational cash flows.
S&P sees small-cap biotechs conserving cash to delay raising capital until late-stage drug candidates near approval and provide potential for a higher valuation, thereby lessening dilution. Several outfits have outsourced their clinical programs to better manage corporate headcount and operating expenses. Cancer therapeutics remains the primary growth impetus, in S&P's view, and Silver sees the prospects for autoimmune and inflammatory treatments remaining positive as well. All told, S&P expects the competitive environment for treatments for most key diseases to intensify.