Six biotech stocks set to take off

In the quest for returns, investors are seeking out riskier opportunities - and they don't come much riskier than biotech. Here are six stocks that the braver investor might want to take a look at.

It's been a nasty five years for tech investors, but all of a sudden it seems the sector is back in favour. Those still in any doubt need look no further than Google. Shares in the firm have jumped 370% in the last 18 months and most analysts (Henry Blodget, one of the biggest cheerleaders of the internet boom, unexpectedly excepted) think it's going much higher, despite the fact that it already trades on a silly p/e of 100 times.

But what of the biotechnology sector? It went just as crazy in the late 1990s as the tech sector and then collapsed just as hard. Will it now join the resurgence too? The Independent's Stephen Foley thinks so. Rising stockmarkets, such as those we saw in 2005 and that most expect to see in 2006, give investors confidence to seek out riskier opportunities, he says. The pioneering niche drug developers of the biotech industry are some of the "most seductive" of those opportunities. For those brave enough to get in, biotech could pay off "handsomely" in 2006.

Do you really need to be brave to invest in biotech? Not really, says Robert Cyran on Breakingviews.com. The industry has been on its way to achieving respectability for some time now. Genentech, the first biotech company, founded 30 years ago, boasts a market capitalisation close to $100bn, and the larger biotech stocks, such as itself and Amgen, have outperformed as portfolio managers begin to consider them a "sexy alternative" to the big pharmaceuticals, unencumbered as they are by patent expiry issues.

In recent years, the industry has also matured enough to be embraced by the research arms of the big pharmaceutical players. In the last few months alone several of the major firms have shown they have an appetite for the area by either buying in promising experimental drugs from biotech firms, or by simply buying the firms themselves. AstraZeneca announced three such deals over Christmas, and Vectura and the privately held Astex signed some of the biggest-ever biotech licensing deals in 2005.

This all makes complete sense, say Andrew Jack and Lisa Urquhart in the FT. For many years, the big pharmaceuticals had an edge when it came to drug development (being the only ones with the vast amounts of cash needed to get a drug to market) and the mega-mergers of the 1990s allowed them to increase their critical mass and pipelines of new drugs still further. However, over the last few years, the downside of being big has begun to emerge bloated behemoths often don't innovate well, and things are swinging back the other way. Firms such as GlaxoSmithKline have begun to restructure large research laboratories into smaller, more entrepreneurial research and development units, and everyone's trying to buy in innovation.

This is all good news for good businesses operating in the biotech sector, but it does not necessarily make for good investments. The ongoing "land grab" means that many valuations have already been pushed to very high levels. Genentech itself now trades on a hefty 56 times forward earnings. At least ten biotech companies (including Entelos, a specialist biotech firm based in the US, and Chinese fertiliser firm Bodisen Biotech, which was recently picked by Forbes as one of the top 100 Chinese growth companies) are now planning to take advantage of the situation by listing in London, says Richard Irving in The Times.

Before you dive in to buy shares in them, or in any other, smaller biotech firms, a word of warning, says Cyran. For every success story in the sector there are many more failures. On the face of it, small biotechs now look better value than big ones, but the smaller the company (and the fewer drugs it is developing), the higher the risk.

The six best bets in the sector

The Independent tips a number of biotech stocks for outperformance in 2006. One of interest might be Edinburgh-based Ardana (ARA, 134p). Although it currently makes a loss, it has built an impressive portfolio of currently marketed, or "near-to-launch" products in the area of sexual health, a market worth about £15bn a year.

The Independent also likes Cambridge Antibody Technology (CAT, 692.5p), one of the "grandaddies of the sector"; Vectura (VEC, 90p), which makes inhaled drugs; and Acambis (ACM, 194.8p), which missed out last year on the enthusiasm for vaccines, but which has a "strong pipeline of products".

The Investors Chronicle tips Plethora Solutions (PLE, 261p), an Aim-listed firm that has a "healthy cash balance" and is developing drugs for incontinence and premature ejaculation. Collins Stewart analyst Navid Malik puts fair value for the firm at twice the current share price.

Kiplingers points to Amgen (AMEI, 4,426p), where Citigroup analyst Elise Wang sees growing sales for its existing blockbuster drugs, combined with a promising pipeline of potential drugs feeding through into good performance. Amgen has maintained 21% revenue growth in the last five years, has a healthy balance sheet and trades on a forward p/e ratio of 22 times. Now at $77 in the US, Wang believes the shares can hit $100 in 2006.

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
19 Feb 2021
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
16 Apr 2021
Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021
Three of corporate Japan’s hidden gems to buy now
Share tips

Three of corporate Japan’s hidden gems to buy now

Professional investor Nicholas Price of the Fidelity Japan Trust picks three of his favourite Japanese stocks that he thinks the market has overlooke…
12 Apr 2021

Most Popular

Lab-grown meat: how “moo’s law” will drive innovation
Soft commodities

Lab-grown meat: how “moo’s law” will drive innovation

Jim Mellon and Anthony Chow, co-founders of Aim-listed Agronomics, explain why they believe that “cellular agriculture” will benefit from massive long…
16 Apr 2021
Lab-grown meat: the new agricultural revolution
Soft commodities

Lab-grown meat: the new agricultural revolution

Vegan alternatives are taking off, but the future of food technology lies in lab-grown meat – cultivating steaks and burgers from animal cells, says A…
16 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021