Healthy Pipeline

Area of coverage: Biotechnology

Sector outlook: Concerns over competition in monopoly franchises have led to significant P/E contractions for the big-cap biotechs in 2007 and created an attractive entry point for many stocks. Regulatory and political risks remain high for the sector, as politicians debate issues of drug pricing, nationalized health care, generic biologics, and drug safety. Although we are not forecasting any major regulatory shift, these risks could continue to put downward pressure on already reduced P/E multiples. We continue to expect M&A to be an important growth strategy for large cap biotech companies, and late-stage small- to mid-cap biotech companies will remain targets for both large-cap biotechs and big pharmaceutical companies.

In the big-cap space, we recommend sticking with the high-quality stocks with solid revenue growth and are looking forward to potential sentiment changes for more out-of-favor names. In the smaller-cap space, we recommend later-stage companies (e.g. Progenics and Cubist) and recommend owning of basket of stocks with upcoming catalysts. M&A is also likely to continue to be a driver for small- to mid-cap stocks, and the primary targets will likely continue to be companies with late-stage or marketed products, in our opinion.

Outperform Ratings: Affymax Inc. (AFFY), Alexza Pharmaceuticals Inc. (ALXA), Allos Therapeutics Inc. (ALTH), Avigen Inc. (AVGN), Cubist Pharmaceuticals Inc. (CBST), Genentech, Inc. (DNA), Gilead Sciences Inc. (GILD), Lexicon Pharmaceuticals (LXRX), Medivation (MDVN), Progenics Pharmaceuticals Inc. (PGNX), Regeneron Pharmaceuticals Inc. (REGN) and Seattle Genetics Inc. (SGEN).

About Genentech: We reiterate our Outperform as Q2 results were generally better than expected with upside EPS primarily from sales to partners and core U.S. oncology. Our positive long-term thesis is based on the growing robust pipeline, increasing margins, consistent upside to EPS, potential new blockbuster indications such as in adjuvant care, and ongoing operational execution. We believe Genentech remains very attractive at current levels and expect the stock to eventually rally during the second half of 2007 and early 2008, based on our expectation for positive Phase III data for Avastin in adjuvant colorectal cancer in 2008.

Total revenue was $3.00 billion vs. our estimate of $2.86 billion. EPS was $0.78, ahead of our estimate of $0.74 and consensus of $0.71 primarily from $56 million in upside sales to partner Roche and $19 million in U.S. product sales. U.S. sales strength came from Rituxan in the maintenance of non-Hodgkins lymphoma and rheumatoid arthritis, increased penetration of Herceptin in adjuvant breast cancer and growth of Avastin in lung cancer.

Based on the upside in the quarter, management raised 2007 EPS growth guidance to 28 percent to 32 percent from 25 percent to 30 percent, implying EPS of $2.85-2.95. Guidance may be conservative given the strong upside and consistent EPS outperformance. We raised our 2007 estimated EPS to $3.05 from $3.03 (for 37 percent year-over-year growth), which we believe remains achievable. The biggest clinical value driver is expected in 2008.

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Charles DuncanJMP Securities LLC|[email protected]

Area of coverage: Biotechnology

Sector outlook: The outlook for this sector is pretty good. The demographic trends favor biotech investing. In general, we have been seeing more innovation and maturity in this sector than in the past. We are entering a golden era. There is a favorable regulatory environment for these drugs. Compared to big pharmaceuticals, biotech is better prepared to provide targeted therapies.

About Allos Therapeutics Inc.: Allos announced final results from its ENRICH pivotal Phase III study of Efaproxyn plus whole brain radiation therapy (WBRT) in women with brain metastases from breast cancer. We do not anticipate the discontinuation of this trial to impact cash use in fiscal year 2007, as the majority of planned costs for the year were related to the advancement of Pralatrexate (or PDX), used to treat T-cell lymphoma.

While the Efaproxyn news was disappointing but not unexpected, we continue to have strong conviction in the company’s other lead product candidate, PDX. Allos plans to focus on its Phase II PROPEL clinical study of PDX. We anticipate an interim futility analysis in the second half of 2007 after 35 patients have completed one cycle of treatment.