New drugs, deals seen boosting biotech in 2006

• Drug News • Feb 21, 06

The biotechnology sector looks set to grow again in 2006, helped by new drug approvals, a relative lack of generic competition and the eagerness of big drug companies to partner with—or acquire—those with products at early stages of development, analysts said.

“It’s been about three years since biotech bottomed out, and this bull period feels much more controlled and sustainable than others,” said Eric Schmidt, an analyst at SG Cowen & Co.

Over the next three days executives from more than 30 biotechnology companies will discuss the future of their new products, the potential for collaborations, and the regulatory environment at the Reuters Biotechnology Summit to be held in London, Boston and Los Angeles.

Last year the American Stock Exchange Biotechnology Index <.BTK>, which includes the biggest biotech stocks, rose 25 percent. The broader Nasdaq Biotechnology Index <.NBI>

rose just 3 percent.

That gap could narrow, though, as big drug companies, which once focused on deals with companies who had products in the late stages of development, seek out smaller, cheaper products, to boost their ailing drug pipelines.

“I think this may a year when small and mid-cap companies do well,” said Daniel Omstead, chief executive officer of Hambrecht & Quist Capital Management LLC. “You’re starting to see big pharmaceutical companies do deals with the little companies for more than just late-stage products.”

Picking the winners among the smaller companies will, as always, be a challenge.

“While our macro view is bullish on small-cap biotech for 2006, we do not recommend indiscriminate buying,” said Joel Sendek, an analyst at Lazard Capital Markets.

Sendek said certain stocks that declined in value despite the 2005 run-up may be set to rebound in 2006, including OSI Pharmaceuticals Inc.

and MGI Pharma Inc.

Global biotechnology sales are expected to rise 13 percent to 14 percent in 2006, driven by new product introductions and the growth of existing products, according to IMS Health, a pharmaceutical information and consulting company.

While almost everyone involved in biotechnology has had their share of heartaches, few disappointments were as spectacular as the withdrawal last year by Biogen Idec Inc.

and Elan Corp. Plc

of multiple sclerosis drug Tysabri after three patients contracted a rare brain disease.

A closely watched event this year will be whether U.S. regulators will allow the product—which analysts had once expected to be a blockbuster—back to the market. Optimism grew earlier this month when the U.S. Food and Drug Administration said the company could resume clinical trials in patients who had previously been receiving the drug.

The decision is important not just for the companies involved but as a barometer of the FDA’s attitude toward risk, which tightened considerably after Merck & Co.

withdrew its painkiller Vioxx but may be loosening slightly now.

“Public concern over drug safety issues is waning and new drug approvals have occurred in a relatively timely and transparent fashion,” said Schmidt, in a report.

More than 25 products could be approved this year in the U.S. alone, including panitumumab, a colorectal drug from Amgen

; telbivudine, a hepatitis B drug from Idenix Pharmaceuticals Inc. ; indiplon, an insomnia treatment from Neurocrine Biosciences Inc. ; and Lucentis, a drug for wet age-related macular degeneration from Genentech Inc. , which is majority owned by Roche Holding AG

Genzyme Corp.

expects to hear within the next two months whether European and U.S. regulators will approve its drug Myozyme for Pompe disease, a debilitating and often fatal muscular disorder.

In Europe, where the industry is less mature, investors are also awaiting some pivotal news, with Belgium’s UCB

set to file Cimzia for Crohn’s disease and Spain’s Zeltia

due to resubmit cancer drug Yondelis.

Stephen McGarry of Goldman Sachs in London believes consolidation could drive the sector in Europe this year, as companies with cash or strong valuations seek to broaden their portfolios through acquisitions.

Many biotech companies remain loss-making—particularly in Europe—but as more products progress to market, more businesses should move into the black.

The average profitable U.S. biotechnology company trades at about 30 times 2006 expected earnings, Schmidt said, roughly in line with historical levels.

“We believe this multiple is sustainable and expect the average large company to appreciate in line with the industry’s 15 percent to 20 percent growth rate,” he said.

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