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Ramond James' "buy" rating for Genworth tied to Biogen's drug

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(Bloomberg) — Investors should buy Genworth Financial Inc. shares on the prospect that Biogen Idec Inc.’s experimental Alzheimer’s drug could reduce claims costs at the long-term care insurer, Raymond James & Associates Inc. said.

“Investors in Genworth are receiving a free option on the drug,” Steven Schwartz, an analyst at Raymond James, said in a note Monday. “About 50 percent of Genworth’s long-term care insurance claims payments are for Alzheimer’s or other forms of dementia.”

Biogen’s BIIB037 cut cognitive decline, with higher doses and longer treatment resulting in increased improvement in an early-stage trial of 166 patients, according to results released last week. The drug reversed build-up of beta amyloid, a protein fragment.

Genworth has been battered by higher-than-expected costs in long-term care insurance, which covers costs for nursing home stays or home health aides. The stock plunged more than 50 percent in the 12 months ended March 20 as the Richmond, Virginia-based company reported a record loss.

BIIB037 is moving this year to final-stage trials, where other promising Alzheimer’s drugs have fallen short. Even if the treatment proves effective, it could take years to come to market.

“If — and it’s a big if — BIIB037 is successful, then the results for Genworth’s long-term care business could be significant,” Schwartz said. He raised his rating to strong buy from outperform.

Genworth rose 5.2 percent to $7.76 at 9:58 a.m. in New York, the biggest increase in the Standard & Poor’s 500 Index.

The insurer is worth buying even without the Biogen option, Schwartz wrote, because the company could be broken up for more than it’s currently trading. His price target for Genworth is $12.

‘Potential Positives’

“We believe very little in the way of potential positives has been priced in,” Schwartz wrote. “Specifically, the potential sale of the Lifestyle Protection business, the expected selldown of the Australian mortgage insurance business, potential sales — presumably through reinsurance — of fixed annuity and life blocks, and a possible eventual breakup” into life and mortgage-insurancecomponents.

–With assistance from Kanoko Matsuyama in Tokyo and Crayton Harrison in New York.