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Crash Insurance

Last week’s Dow collapse wasn’t really about China or a recession. It was plain old slow growth. Biotech stocks are one remedy.


Illustration by Marc Boutavant  

No wonder so few people make money in the stock market. The bogus information, like the nonsense I have been hearing about last week’s plunge, would throw even the savviest of investors off the scent of profits. Sure, China’s market went down and then we went down, but did anyone rewind the tape? We’d been going down pretty steadily for a week before China. And yes, the market melted down on a system overload. Yawn.

No, what’s really happening is that the economy peaked and started heading south in the last quarter of last year. It continues to do so this quarter, and while I don’t think we are headed into a recession, as Alan Greenspan blurted out last week, we have to stop focusing on those companies that do well in a strong U.S. economy and start looking at those that do well in a weak one—the so-called defensive stocks.

Let’s just look at one sector—pharmaceuticals. In the old days, I would have reached for the old standbys, the stocks of companies that I find in my medicine chest (everything there still gets used when we all lose our jobs). But these are not the old days. You can keep hoping that Pfizer will return to its former glory or that Merck will suddenly start doubling and tripling as it did routinely in a previous century. You can pray that Bristol- Myers gets bailed out by a takeover bid, or that Eli Lilly comes up with another miracle drug like Prozac or Zyprexa. Or you can start making money again in the only pharmaceutical stocks that work: the biotechs. Most of the once-great drug companies are now just giant sales forces flogging doctors with various versions of the same old drugs, many of which face imminent expired-patent destruction. And they are public enemy No. 1—worse than oil!—in the new Congress, where the Democrats constantly whine about the need for major drug companies to charge less for their products.

But the biotech companies are all about the future, with potential blockbusters and approvals in front of them, not behind them, and limited competition for most of their current offerings. These companies have pipelines—what drugs really trade on—and trials that could propel them much, much higher than their current levels. Even if an old-line company merges or gets a bid—the only real hope for appreciation—it couldn’t produce the kind of upside that the biotechs give you. Their research bent and their ability to focus on highly specialized, low-profile illnesses keep them out of the crosshairs of the Democrats.

So what’s got the most upside? I’ve got four companies that could have years and years and years of great growth that a Pfizer or a Lilly could only dream of (Genentech, Celgene, Gilead, and Genzyme), a wild-card stock that could get a bid within the next year because of a recent successful cancer trial (Onyx Pharmaceuticals), and two companies (Altus and Exelixis) that are speculation plays. With their promising drugs still in FDA trials, they could either go boom or bust.

Genentech, which some consider to be the first biotech stock ever, has the single most important drug franchise in the world today, the Avastin anti-cancer business. We know cancer’s a bizarre rubric, encompassing all sorts of strains and versions that can’t be cured by one drug. But Avastin has tackled lung cancer more successfully than anything else in a doctor’s arsenal, and now Genentech’s got dozens of tests going on to use the drug on other cancers, many of them showing promising early results. Lately there has been talk that even a little Avastin works so well against cancer that doctors don’t need to use big doses, something that analysts fear could hurt Genentech’s earnings. I say use the weakness this worry has created to buy the company’s shares at a meaningful discount before the next big Avastin success story. Genentech’s not a one-trick pony, and it’s got a new drug, Ocrelizumab, that could be a breakthrough for both rheumatoid arthritis and multiple sclerosis. Ocrelizumab’s full potential seems unknown to Wall Street but could boost DNA, the stock symbol we all know the company by, later in 2007.

Celgene, like Genentech, has invented a drug, Revlimid, meant initially for bone-marrow cancer, that could turn out to be used for many other hard-to-beat types of cancer. Celgene’s running 75 anti-cancer trials for Revlimid worldwide, including one for multiple myeloma that I think could be huge for the stock. Celgene just reported a great quarter, and while the stock has been stalled in the 50s for months, I think now it’s about to break out given the incredible sales of Revlimid last quarter and the potential for some great headlines in the coming year.


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