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Biotech/Health Care Investing: Selective Growth

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Alexandra Hauber
J.P. Morgan
[email protected]

We expect currency to have a significant impact on 2009 earnings. The biggest effect, due to the British pound weakness, is likely at GlaxoSmithKline (GSK) and AstraZeneca (AZN).

We expect several major clinical trials to report. Results from the C’08 study will show whether Avastin (Roche/Genentech) works in adjuvant cancer. Data for AZD6140 marks the next major datapoint for AstraZeneca’s pipeline. Actelion has three major phase-III studies set to report in the second half.

Our top picks for 2009: Roche, Ipsen and Shire. Roche, in our view, offers the best long-term growth potential of the EU large caps (15.5 percent vs. 6.7 percent 2008-2013E CAGR), with potential positive catalysts from wild card Avastin adjuvant data in mid-2009 and removal of the Genentech acquisition overhang.

With no major patent expiries expected in the medium term and its strongly growing oncology product portfolio, we forecast that Roche has the best long-term EPS growth in the sector.

As for Sanofi Aventis, a difficult outlook has prompted change at the top. In late 2008, Chris Viehbacher took over as CEO, followed by the elevation of Laurence Debroux, CFO [and Chief Strategic Officer], as his direct report. The new CEO faces a huge challenge. However, he has a good track record of cost control and is running a company with a strong balance sheet – expect a focus on profitability as the new CEO takes control. We now expect adjusted EPS of 6.20 euros in 2009, growth of 14 percent reported terms and 7 percent at constant exchange rates.

Tycho W. Peterson
J.P. Morgan
[email protected]

We are introducing price targets for our universe of life science tools and diagnostic companies and maintaining our current ratings distribution and favorable outlook on consumable suppliers (Life Technologies, LIFE; Thermo Fischer Scientific, TMO) and companies targeting higher growth markets, such as genetic analysis (i.e., Illumina, ILMN).

End market demand [from pharmaceutical, biotech, clinical research organization and industrial customers] remains soft; although we remain encouraged [about academic demand] by the prospect of an increasing National Institutes of Health budget, which remains the largest academic funding body in the U.S.

Specifically, we expect that the Federal stimulus package could include a modest NIH component ($1 billion to $1.5 billion), although this may not begin to impact demand until the second half of 2009, and accordingly, expectations for the tools group remain low for the first half of 2009.

Amit Hazan
Oppenheimer & Co.
[email protected]

The Oppenheimer Midcap MedTech Index has commanded an average multiple premium of about 20 percent over the S&P for the past 15 years, 46 percent over the most recent five years and 36 percent today. But clear fundamental changes now under way dictate more scrutiny over the premium than at any time in recent memory, and the sustainability of valuations at least 20 percent above the market now looks at risk.

Earnings for this group will still likely be up in 2009 (a feat that most pundits argue the S&P will not enjoy), so some premium is surely warranted.

While the economy continues to dominate conversations in 2009, we highlight several issues to watch that may separate the rare buys from the sub-sectors and stocks to avoid: (1) pricing pressures and gross-margin pressures; (2) pipelines of new product; (3) merger and acquisition activity; (4) Street expectations and management guidance; and (5) foreign currency.


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