Analysts Give Their Best Biotech Bets

The toy fair isn’t the only meeting of the minds taking place in New York this week – the Biotechnology Industry Organization is having its annual convention as well. Two biotech analysts came on “Street Signs” to discuss where investors can make money in the sector.

Eric Schmidt of Cowen & Co. says Cephalon is the clearest growth story in the industry. The biggest driver for Cephalon is its drug Provigil, which is used to combat sleep apnea. Schmidt sees sales of Provigil growing a least 30 to 40% over the next 5 years – and Cephalon shares could see triple-digits as well, he says. Cephalon has long been an undervalued stock, according to Schmidt, but a turnaround in 2007 will likely have investors changing their tune.

Joel Sendek of Lazard Capital Markets doesn’t track Cephalon, but he says Genentech is his top pick. The stock’s multiples have come down dramatically over the last few years and investors can actually it for a P/E below its growth rate (Sendek’s growth estimate is 31%). Genentech is truly a “one-of-a-kind company,” Sendek says. Coupled with the fact that it has no legitimate competitors and a strong pipeline, the stock can only go up. He gives a price target for Genentech of $110.

As for takeovers in the sector, Sendek has his eye on MGI Pharmaceuticals and OSI Pharmaceuticals . MGI’s strong supportive care franchise and OSI’s cancer and diabetes franchises make both companies attractive to larger companies looking to expand further. Schmidt says Cephalon, his candidate for best stock in the sector, has a strong possibility of becoming the target of a takeover by a Big Pharma component as the stock corrects.

Analyst Disclosure: Cowen & Co. has received compensation from BioMarin (mentioned during the interview), and that firm is a client of Cowen or its affiliates. Viropharma, also mentioned during the interview, is an investment banking client of Lazard Capital Markets; and Lazard makes a market in MGI Pharmaceuticals securities.