Value vs. opportunity

Some things change, some stay the same. What hasn't changed going into 2007 is that fundamentals still rule; what has changed is the absence of big cap names in this year's regulatory queue. And while the number of products with planned Phase III data events and regulatory submissions this year is similar to last, there aren't many with the potential of, say, a Lucentis, as many of the most interesting late-stage biotech compounds have disappeared into big pharma and big cap biotech after multiple years of asset grazing.

As a result, many investors polled in BioCentury's 15th annual review of buyside sentiment are looking at small and mid-cap companies with earlier stage products - a move born of necessity but underpinned by big pharma's need to feed its machine. Thus, while the buyside was interested in early stage products for all the wrong reasons 15 years ago, this time around their interest looks to be well placed. Indeed, 2007 could be the year of the Phase II.

At the same time, investors are seeing the big cap biotech names as value plays with reliable profit streams. Thus, the plan of attack for many investors polled by BioCentury is to invest in big cap "value plays" while looking for bigger pops among companies with earlier-stage milestones.

And coming off the second best fundraising year ever for the biotech sector, some of the buysiders polled by BioCentury suggest even more money may be put to work in 2007.

"More money should be invested in the biotech sector in 2007, despite the good run over the recent past," said Nick Draeger of Adamant Investments. "Some money will probably be diverted from other sectors, and some of the money that had been diverted to other investment areas will return."

Money managers have the incentive of past successes. There were 62 companies with market capitalizations above $1 billion at year end, up from 57 at the end of 2005. And when the 2006 numbers are totted up, 19 biotech drugs are projected to show sales in excess of $500 million last year, including some showing high double-digit growth such as Avastin, Erbitux and Herceptin (see "Top Biotech Products," A6, "Post-Launch Report," A5, & "New Products to Watch," A11).

Big value, little data

In 2006, the consensus was that the top tier would struggle to maintain its momentum from 2005, when the group was up 25%. No fewer than 11 big cap biotechs had a deadline for FDA or EMEA actions in 2006, but despite the bolus of regulatory news, investors worried that many of the top names had overhangs that would prevent a repeat of 2005's stellar performance.

As it turned out, 2006 indeed was lackluster for the bellwethers valued above $3 billion, which collectively fell 2% and trailed both the mid-tier biotechs and the NASDAQ composite. Indeed, two companies accounted for most of the top tier performance: Celgene Corp. (CELG, Warren, N.J.) and Gilead Sciences Inc. (GILD, Foster City, Calif.). CELG surged 78% last year, while GILD added 24%.

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