Chicago, IL - June 24, 2009 - Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: LabCorp (LH), Monogram Biosciences, Inc. (MGRM), Pfizer (PFE), Quest Diagnostics (DGX) and Myriad Genetics (MYGN).

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Here are highlights from Tuesday's Analyst Blog:

Monogram Acquired by LabCorp

LabCorp (LH) and Monogram Biosciences, Inc. (MGRM) announced that they have entered into a definitive agreement and plan of merger under which LabCorp will acquire all of the outstanding shares of Monogram in a cash tender offer for $4.55 per share.

The deal has an implied total equity value of approximately $106.7 million, or a total enterprise value of approximately $155 million at March 31, 2009, including net indebtedness. The closing of the acquisition is expected in the third quarter of 2009.

Monogram Biosciences, Inc. is a leading provider of companion diagnostics -- molecular diagnostic products that help guide and target appropriate treatments. The company's focus is on infectious disease and oncology. Lead marketed products include Trofile assay which identifies patients who are eligible for the CCR5 class of HIV drugs, and is the widely-adopted companion diagnostic for Pfizer's (PFE) HIV drug Selzentry, PhenoSense and PhenoSense GT HIV tests, which measure individual patient viral drug resistance, thereby enabling physicians to design optimal, individualized treatment plans for each patient.

PhenoSense® and PhenoSense GT® are among the most widely used HIV resistance tests in the market today. Monogram's HIV tests are used routinely by physicians for managing patient therapy and are an integral component of anti-HIV drug development and clinical evaluations for the pharmaceutical industry.

In the oncology front, Monogram's proprietary VeraTag technology has been used to develop a sensitive means to assess HER-2 status in tissue samples and has significant potential as a tool to help guide therapy decisions in breast cancer patients. Based on the VeraTag platform, Monogram has multiple tests in development for measuring a variety of protein markers that may have clinical utility to help guide treatment decisions across a broad range of cancer drugs.

More Deals Expected Following the Transaction

The transaction could have a significant impact for the whole molecular diagnostics industry, in our view. The M&A activity has been very active in the Pharma/Biotech industry for the last a couple of years. However, most of those transactions have been focused on the area of therapeutics.

Molecular diagnostics has enjoyed rapid growth in the past decade due to the breakthrough in genomics and proteomics. Personalized medicine has played a critical and important role to improve therapeutic agents and reduce whole healthcare costs. Europe continues to outpace the US in the area of molecular diagnostics.

In the US, the diagnostic market is relatively fragmented with many small players. Two relatively big players are LabCorp and Quest Diagnostics (DGX), which command a majority of the market shares. Small players like Monogram and Myriad Genetics (MYGN) are more focused on one or two areas in which they have expertise.

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Company Description

Becton, Dickinson and Company is a medical technology company that develops, manufactures and sells medical devices, instrument systems and reagents. BD is focused on improving drug delivery, enhancing the quality and speed of diagnosing infectious diseases and cancers, and advancing research, discovery and production of new drugs and vaccines.

Founded in 1897 and headquartered in Franklin Lakes, New Jersey, BD employs approximately 28,000 people in approximately 50 countries throughout the world. The company serves healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical industry and the general public.

Solid Fundamentals

Becton, Dickinson and Company's return on equity (ROE) of 24% tops the industry's average of 20%. The company's net profit margin of 16% is well above the industry average of 7%.

The company continues to see bullish forecasts from Wall Street. Analysts are projecting earnings growth of 10.5% for the fiscal year ending September 2009 followed by growth of 10.5% more in fiscal 2010.

BDX's second-quarter report is slated for release on April 28.

A Recent Dividend

In early February, the company declared a quarterly dividend of 33 cents per share, which was paid out on March 31. The company offers an industry-leading yield of 2%.

Strong Fiscal First Quarter

In Late January, Becton, Dickinson and Company released results for its fiscal first quarter. Revenues jumped 1.6% on a year-over-year basis. Earnings per share of $1.26 came in ahead of last year's $1.07 and topped the consensus estimate by 9%.

"BD is off to a solid start to fiscal 2009. In particular, we continue to see strength in our Biosciences and Diagnostics segments and strong sales of insulin delivery products," said Edward J. Ludwig, Chairman and Chief Executive Officer. "In addition, our strong earnings per share growth has given us the confidence to raise guidance for fiscal 2009."

The company expects 9% to 11% earnings per share growth for the full fiscal year of 2009, versus t he prior year. Wall Street sees 10% growth. Zacks Investment Research

When President Obama's administration released the proposed budget for the upcoming fiscal year, drug stocks quickly dropped. Fears of socialized medicine, or "Hillary-Care 2.0" turned investors away from the sector.

Was the drop warranted?

There are 6 key components to healthcare reform that could have a meaningful impact on pharmaceutical and biotechnology companies in the near future.Four of these are potentially negative, whereas the other 2 are potentially positive.

First Potential Negative: Increasing Pricing Rebates

The new proposal calls for an increase in Medicaid rebates from the current level of 15% to 21%. This equates to a 6% decrease in pricing power by all the companies in our universe into the Medicaid market. If we delve deeper into the ramification of this action, we see that the potential earnings impact for most large pharmaceutical companies is in the area of 1%, at most.

Most pharmaceutical companies average roughly 5% to 20% of their U.S.business to Medicare / Medicaid. Some companies, including Wyeth (WYE), Pfizer (PFE), and Abbott Labs (ABT) are on the low-end, whereas others, such as Bristol-Myers Squibb (BMY), Eli Lilly (LLY), Merck (MRK), and Gilead (GILD) are on the high-end.

The overall impact to the top-line is muted significantly for companies with greater sales outside the U.S., including PFE, ABT and Johnson & Johnson (JNJ).

Notice Abbott and Pfizer are on the right side of that list twice, low exposure to Medicaid, high percent of sales outside the U.S. But nevertheless, we would classify the 1% EPS risk associated with increased pricing rebates as mostly bark, only a tiny bite.

Segment Analysis For Top Drug Companies
Company	% U.S. Revenues*	Est. % Govt. Biz	% At Risk Exposure
Abbott Labs	48%	~8%	~4%
Bristol-Myers	59%	~14%	~9%
Johnson & Johnson	51%	~9%	~5%
Merck & Co.	56%	~10%	~6%
Schering-Plough	30%	~8%	~3%
Eli Lilly & Co.	54%	~18%	~10%
Pfizer, Inc.	42%	~6%	~3%
Wyeth, Inc.	47%	~5%	~2%
*Revenues include all operations, not just Pharmaceuticals

Second Potential Negative: Biologic Generics

It is clear that we will have some sort of path to approval for generic biologic drugs, or "biosimilars," in the near-future. New draft legislation is expected to call for 10 years of market data exclusivity for new biologic drugs - a victory for the biotech industry as Representative Henry Waxman (D-CA), Chairman of the House Energy and Commerce Committee, recently introduced a bill calling for only 5 years of data exclusivity.

But biosimilars will not be as devastating to biotech products as generics were to small molecules. Manufacturing biologic drugs is significantly more cost prohibitive and knowledge intensive than small molecules.

Biotechnology companies themselves often struggle with manufacturing scale-up and meeting demand. Manufacturing Eli Lilly's Erbitux or Amgen's (AMGN) Enbrel is no easy task. There are few generic manufacturers with the necessary expertise, or capital required, to manufacture large batches of biosimilars.

And, there are significant additional hurdles. If the FDA will require proof of bioequivalency, then generic manufacturers will need to start doing costly large-scale clinical trials - something most will shy away from doing. Conversely, if the FDA does not require a bioequivalency study, we believe most doctors will shy away from using the "biosimilar" products because they know the complexity of the manufacturing process and have no proof that the generic Aranesp really is identical to the branded Aranesp.

It's a catch-22 that generic companies looking to break into the biologic market will have to deal with.

That being said, firms with potentially the biggest risk exposure to generic biologic legislation include Amgen and Biogen Idec (BIIB). Teva Pharmaceuticals (TEVA) is most likely the biggest winner.

Top Biologic Drugs And Their Patent Expiration
Neupogen (Amgen)	2013	Neulasta (Amgen)	2015
Aranesp (Amgen)	2014	Enbrel (Amgen)	2012
Myozyme (Genzyme)	2016	Fabrazyme (Genzyme)	2015
Herceptin (Roche)	2019	Avastin (Roche)	2018
Rituxan (Roche)	2018	Lucentis (Roche)	2018
Erbitux (Eli Lilly)	2017	Remicade (J&J)	2014
Humira (Abbott)	2016	Synagis (AstraZeneca)	2018

Third Potential Negative: Drug Reimportation

A consortium of 4 Senators (Dorgan D-ND, Stabenow D-MI, McCain R-AZ, and Snowe R-ME) introduced in early March 2009 the, "Pharmaceutical Market Access and Drug Safety Act." The bill would allow U.S.-licensed pharmacies and drug wholesalers to import FDA-approved medications from Canada, Europe, Australia, New Zealand and Japan - areas where drug prices are on average 35% to 55% lower than in the U.S. The legislation would also allow individual consumers to purchase prescription drugs for personal use from safe, reliable, FDA-inspected Canadian pharmacies.

The Congressional Budget Office (CBO) estimates the bill would save American consumers $50 billion over the next decade, including more than $10 billion in federal government savings. If we assume the savings are linear, or average roughly $5 billion per year, that represents approximately 2% of the total U.S. $250 billion pharmaceutical market. The EPS impact from a 2% haircut to the top-line of each pharmaceutical company, assuming drug reimportation hits everyone equally, is extremely manageable, and will most like average no more than 1% to 2% per company if enacted.

Fourth Potential Negative: Tax Reform

(This also the one with the most teeth.) .

Tax reform has little to do with fixing the healthcare system and more to do with closing loopholes and going after drug company's profits directly.  It is also by far the most socialistic approach to the problem, as we would classify drug reimportation and biosimilars as more capitalistic approaches.

Over the past several years large-pharmaceutical companies have gotten quite good at lowering their effective tax rates thanks to foreign subsidiaries and R&D credits. In fact, the average tax rate using the 14 largest U.S-based pharmaceutical and biotech companies in 2008 was 23%.

It is possible that the President's proposal could raise the effective rate for each firm to 30% by closing these loopholes and cutting R&D tax credits.

That equates to a 7% increase in effective tax rate for the average company, or as much as a 20% to 30% decrease in net income. The details on the tax reform aspect to President Obama's proposal have yet to be divulged, but this does have the potential to be a significant negative for our coverage universe.

2008 Tax Rates for Top U.S. Drug Companies
Abbott Labs	22%	Amgen	22%
Bristol-Myers	22%	Alcon, Inc.	15%
Genentech	36%	Biogen Idec	29%
Genzyme	34%	Gilead Sciences	27%
Johnson & Johnson	23%	Eli Lilly & Co.	21%
Merck & Co.	17%	Pfizer, Inc.	22%
Schering-Plough	15%	Wyeth, Inc.	30%

It's not all potentially bad news though with respect to healthcare reform.We see two potentially very positive changes that could emerge as a result of new legislation.

First Potential Positive: New Research Funding

In early March 2009, President Obama reversed a standing executive order from the previous administration by lifting the federal ban on human clinical testing of embryonic stem cells. This opens the door to potentially billions of dollars in government funding for this new, and potentially breakthrough, platform.

Stem cell companies, although mostly small and unprofitable, are the biggest direct beneficiary of the news. However, big pharmaceutical companies are clearly interested in stem cell research, and with a significantly more friendly administration in control, we may see a big push in this area in the coming years.

Besides opening up funding for stem cell research, the Obama administration has made it clear it wants to see additional increases in funding for infectious diseases such as HIV/AIDS and Hepatitis-C, as well as for cancer and obesity-driven diseases such as diabetes and cardiovascular disease.  At this point, similar to the proposed tax reform, the details are thin. How much money the government will spend and who will get the money remains to be seen, but Genzyme (GENZ) and Gilead would seem to be the two biggest beneficiaries of increased funding in their core areas.

Second Potential Positive: Increase Coverage

This is the "no-brainer" when it comes to how universal healthcare would benefit big drug companies. There are an estimated 40 million people living in the U.S. without health insurance. Opening up some sort of government sponsored program that would insure even half of these people would be a significant revenue driver. We would view this as a systemic benefit across the entire universe of healthcare companies.

Potentially another 20 million Americans looking to use prescription drugs could mean as much as another $25 billion in drug sales per year. That would equate to an increase of over 10% in 2010. Therefore, even if pricing drops by 6% and reimportation takes down sales by another 2-3%, the net top-line impact of Obama's healthcare reform may be negligible if the size of the target market increases.

Healthcare Reform Is Necessary

Fixing healthcare, or at least starting on a long-term solution, is at the center of President Obama's plans for the next 4 years, and for good reason.

According to the National Center for Policy Analysis, the unfunded liability associated with Medicare / Medicaid is roughly 7x that of the current unfunded liability for Social Security. By 2030, it grows to 15x the size.

Social Security may be the "third rail" in American politics, but Medicare / Medicaid is the train bearing down on the tracks.

Still Waiting on the Details

It is also critical to realize that many of the details to President Obama's proposal have yet to be ironed out. That debate will take place on the floor of the House and Senate over the next few months.

What was released last month was more a broad stroke, sweeping legislation, plan of action. The President called for a $634 billion healthcare reform reserve fund over 10 years aimed at fixing many of the problems that exist with the current system. This $634 billion is paid for through $318 billion in tax increases on Americans earning over $250,000 and $316 billion in savings to be squeezed from drug makers, hospitals and managed-care companies.

The net result of healthcare reform is likely to be limited on big pharmaceutical earnings.

As noted above, the effective tax rate change has the potential to take the biggest bite out of profits. What we may end up seeing is a small reduction in revenue growth rates for the largest firms by 2% to 4%, with almost this entire drop hitting the gross margin line. Operating margins are likely to remain stable as most of the company look to cut costs and synergize through mega-mergers (Pfizer-Wyeth, Merck-Schering, Roche-Genentech). The mega-merger trend should continue, with names like Bristol-Myers, Eli Lilly, Sanofi-Aventis (SNY), and AstraZeneca (AZN) most likely the next to jump into the fray. Net margins could take a hit if tax rates increase, which would certainly have a negative impact on earnings, but we expect that this type of broad-based impact to the entire sector will have only limited impact on applied valuation multiples.

When the President's budget is finalized we should get a better sense on how the above 6 forces will impact each name individually. At this point, the fear of healthcare reform seems entirely more bark than bite. Although there is bite, the Amex Pharmaceutical Index is now down 13% YTD, and our calculations show that the expected earnings hit, excluding the tax rate issue, is significantly less.

Wishing you luck,
Jason Napodano, CFA
Senior Analyst, Zacks Equity Research

Jason covers the pharmaceutical industry for Zacks Equity Research. His article on how health care reform may impact the drug sector helps us view certain stocks in a new light.For example, Teva Pharmaceuticals is identified as a potential big winner with new generic biologic legislation. If you'd like to see Jason's in-depth research report on TEVA issued April 1, you may download now by starting a free trial to our Zacks Premium service.

This 30-day free trial entitles you to much more than just the TEVA research report. You will also gain full access to:

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Valuations, however, are attractive, with several of the largest players trading at PEs below 10x, including Pfizer (7x), Eli Lilly (8x), Merck (8x), Sanofi (7x), AstraZeneca (7x) and GlaxoSmithKline (9x) based on our fiscal 2009 estimates. Attractive valuations, along with big dividend yields, should protect investors against significant downside risk even if the economy continues to languish well into the second half of the year.

Additionally, expectations are low. Knowing that most of the companies are not expected to generate significant revenue growth, and that cost-cutting initiatives have generally out-paced guidance and financial modeling, any bit of revenue upside could lead to select out-performance at times during the year.

M&A activity remains the wildcard for investment in the sector. We have already seen three significant deals so far in 2009, with PfizerÕs $62 billion acquisition of Wyeth leading the way. RocheÕs $46 billion takeover of Genentech and MerckÕs $42 acquisition of Schering-Plough prove that companies are desperately seeking for ways to grow the top-line while cutting-costs all at the same time.

Big pharmaceutical names are keenly aware of their patient situations and turning to deal-making for the answer. Most of the industryÕs largest players are sitting on significant cash balances, and Pfizer, Merck, and Roche all proved that capital is available for the top players. We expect more deals to come.

Buy rated names, including Bristol-Myers and Johnson & Johnson, are sitting on $10 billion and $16 billion, respectively. Given the difficult cash-raising environment during the second half of 2008, most small- to mid-sized biotech firms are eager to partner with pharmaceutical companies in 2009.

Asset prices for early-to-mid stage product candidates are very cheap, and pharmaceutical companies are now willing to look at phase I and phase II candidates in 2009 -- something most managements have been hesitant to do in the past. This should create a much better environment for the biotech industry to push higher in 2009 as sentiment on smaller names is starting to turn positive.

OPPORTUNITIES

We have three Buy-rated names within the large-cap space: Bristol-Myers (BMY), Johnson & Johnson (JNJ) and Abbott Laboratories (ABT).

For growth funds, we recommend Bristol and Abbott. Bristol is expected to grow earnings by 12% CAGR through 2012. ThatÕs tops in the industry. Growth is sustainable with a product suite heavy in attractive areas such as biologics, cancer and cardiovascular drugs. The late-stage pipeline includes two very promising candidates: apixaban and saxagliptin -- both of which could be blockbusters if approved.

Growth at Abbott is being driven by blockbuster drugs such as Humira for rheumatoid arthritis and the companyÕs drug-eluting stent, Xience. Abbott has also been highly acquisitive over the past few years, most recently paying $175 million to pick up Ibis Biosciences, a subsidiary of Isis Pharmaceuticals, to enhance the companyÕs position in molecular diagnostics for infectious disease.

Our top-pick for value focused portfolios is Johnson & Johnson. The company is trading around 1X growth (PE/G) and sitting on $16 billion in cash. Much like Abbott, J&J has been highly acquisitive over the past year, most recently paying $1.1 billion to acquire medical product maker Mentor Corp. in December 2008. We expect that J&J will continue to look for acquisition targets in both pharma and medical devices throughout the year.

The big opportunity to out-perform in 2009 is to own the names that are going to be acquired. We have no crystal ball, but names that certainly look attractive and fit the model for a large pharmaceutical company to gobble them up include Biogen-Idec, Amylin Pharmaceuticals, Vertex Pharmaceuticals, Acorda Therapeutics, Osiris Therapeutics, Auxilium Pharmaceuticals, OSI Pharmaceuticals, and Elan Corp. All of these companies have what big pharma is looking for -- novel compounds with potential blockbuster sales levels at reasonable valuations.

Our top-pick for biotech continues to be Biogen-Idec (BIIB). Rituxan and Avonex continue to dominate the top-line, but with Tysabri expectations significantly lowered and a late-stage pipeline that boasts seven phase III candidates, we think Biogen is set to out-perform expectations in the years to come. Biogen also possess an enormous biologic manufacturing footprint -- a key asset that could help attract an interested suitor during the year.

On the small-cap, or riskier front, we would point investors towards Osiris Therapeutics (OSIR) with its phase III stem cell candidate, Prochymal, and Acorda Therapeutics (ACOR), with its phase III multiple sclerosis candidate, Fampridine-SR.

WEAKNESSES

We continue to recommend avoiding names that offer little growth or opportunity for a take-out. These include companies developing "me-too" type drugs on hanging on the hopes and prayers of an FDA approval. Now is not the time to be taking on unnecessary risk. The number of new entity approvals was 24 in 2008, up from 18 in 2007, but the number of rejections and delays was also up.

Throughout 2008 it seemed as though just about every FDA action (PDUFA) date was pushed back and delayed. In 2008 we saw our share of surprise rejections and clinical failures as well. Drug development is a risky business; the success rate on new drugs from preclinical to approval is less than 5%.

Stay away from companies that are all ideas and no assets. Above, we discussed some key measures to hang your hat on: cash, dividends, pipelines and strategic assets like biologic manufacturing. If your target company has none of these, now is probably not the best time to roll the dice.

Run from any company looking for money or looking to raise money in the next year. Interest rates on direct financing loans are going to be through the roof, and stock prices are down so big that share offerings will be painfully dilutive. Unless the company is looking to partner with large-cap pharma, expect out-of-cash small-cap biotech to remain out-of-favor.

Above we listed several names that could potentially be taken out by large-cap pharmaceuticals at some point during the year. In contrast, owning the name doing the acquiring is often a sure-fire way to see quick under-performance. PfizerÕs stock dropped by 25% shortly after announcing the Wyeth acquisition. We would be cautious on three names in particular: Sanofi (SNY), AstraZeneca (AZN) and Eli Lilly (LLY), as these are the three largest players in the sector that are likely to "go shopping."Zacks Investment Research

Company Description

Becton, Dickinson and Company is a medical technology company that develops, manufactures and sells medical devices, instrument systems and reagents. BD is focused on improving drug delivery, enhancing the quality and speed of diagnosing infectious diseases and cancers, and advancing research, discovery and production of new drugs and vaccines.

Founded in 1897 and headquartered in Franklin Lakes, New Jersey, BD employs approximately 28,000 people in approximately 50 countries throughout the world. The company serves healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical industry and the general public.

A Recent Dividend

In early February, the company declared a quarterly dividend of 33 cents per share, which was paid out on March 31. The company offers an industry-leading yield of 2%.

Strong Fiscal First Quarter

In Late January, Becton, Dickinson and Company released results for its fiscal first quarter. Revenues jumped 1.6% on a year-over-year basis. Earnings per share of $1.26 came in ahead of last year's $1.07 and topped the consensus estimate by 9%.

"BD is off to a solid start to fiscal 2009. In particular, we continue to see strength in our Biosciences and Diagnostics segments and strong sales of insulin delivery products," said Edward J. Ludwig, Chairman and Chief Executive Officer. "In addition, our strong earnings per share growth has given us the confidence to raise guidance for fiscal 2009."

The company expects 9% to 11% earnings per share growth for the full fiscal year of 2009, versus t he prior year. Wall Street sees 10% growth.

Industry Recognition

BDX recently announced its first-time appearance on the U.S. Environmental Protection Agency's (EPA's) Fortune 500 list of green power purchasers. The company said its purchasing green power in support of EPA's Fortune 500 Green Power Challenge. EPA is challenging Fortune 500 corporations to collectively exceed 10 billion kilowatt-hours (kWh) green power purchasing by the end of 2009. BDX's purchase was ranked 23rd among participating corporations.

More Solid Fundamentals

Becton, Dickinson and Company's return on equity of 24% more than doubles the industry's average of 10%. The company's net profit margin of 16% is well above the industry average of 3%.

The company continues to see bullish forecasts from Wall Street. Analysts are projecting earnings growth of 10% for the fiscal year ending September 2009 followed by growth of 10% more in fiscal 2010.

BDX's second-quarter report is slated for release on April 28. Zacks Investment Research

How has earnings season gone this quarter? Any major surprises?

As you know, most of the companies covered by me are small-cap biotech companies which usually report their quarterly earnings quite late. I just finished updating all my companies last week and I have both positive and negative surprises.

On the positive side, Celgene’s (CELG) Revlimid beat our estimate by $15.8 million; Vidaza sales beat our estimate by $7.2 million. Total product sales beat our estimate by $16.5 million with quarterly sales of $542 million. Celgene’s adjusted EPS also beat our estimate by 6 cents. We have a Hold rating on Celgene due to valuation concerns.

For BioMarin (BMRN), sales for all three marketed products beat our estimate. Both top line and bottom line exceeded our expectations. We have a Buy recommendation for BMRN.

On the negative side, Both Trimeris’ (TRMS) top line and bottom line were slightly below our expectations. For MannKind (MNKD), it total operating expenses exceeded our estimate by $6 million and not loss per share was 7 cents below our expectations. We have Sell ratings on MNKD and TRMS.

Are you expecting M&A activity to continue? If so, for how long?

From the beginning of this year to the date of this writing, M&A has been sizzling for the Pharma/biotech industry. The most high profile acquisitions include the proposed acquisition of Genentech (DNA) by Roche ($44 billion); the $8.8 billion acquisition of Millennium Pharmaceuticals by Japan drug maker Takeda; the proposed acquisition of ImClone Systems (IMCL) by Bristol-Myers Squibb (BMY) ($4.5 billion) and the acquisition of Pharmion by Celgene ($2.9 billion).

We expect the M&A activity will continue in the remainder of 2008 and beyond because we believe that current market environment in the Pharma/biotech industry is favorable for M&A activity. The big pharmaceutical companies have long been faced with big challenges such as patent expiration for blockbusters, low research and development productivity, and generic competition. Platform technology and efficient R&D efforts in smaller biotech companies may be part of the solution to the challenges faced by Big Pharma. As long as the challenges still exist in the pharmaceutical industry, the M&A of smaller biotech companies by big Pharma will continue to make sense.

Which are your top Buy recommendations at this time?

At this time, our top Buy recommendations are AMAG Pharmaceuticals (AMAG) and BMRN.

AMAG’s Ferumoxytol is under FDA review for IV iron replacement therapy for anemia. This product candidate has advantages over current existing products on the market and has great potential since anemia is a very large market. The FDA will make a decision in late October and we expect an outright approval of Ferumoxytol. Our six to twelve month target price is $70.

BMRN has achieved profitability in the first half of 2008 and will become profitable going forward due to strong sales from its three marketed products for rare genetic diseases. BMRN also has a robust pipeline and strong balance sheet. Our price target is $46.

In what ways has the slowing U.S. economy had a direct impact on the companies you follow?

Although the US and the global economies are slowing down, they have not had any negative impact on the companies I follow. As I said earlier in the year, my outlook for the biotech industry in general was positive, and I have not changed my opinion.

Actually, if you compare the performance between the biotech industry and the broad market indices, you will find that the biotech index has been outperforming both the NASDAQ composite and S&P500 index so far. As of August 27, 2008, NASDAQ composite index has declined by 8.7% from the beginning of year. Both S&P500 and Dow Jones Industrial index have double digit decline with Dow declining by 11.8% and S7P500 declining by 11.4%. However, as of August 27, 2008, Amex Biotech index has advanced by 4.5% from the beginning of the year, while NASDAQ biotech index has advanced by 7%.

As an integral part of the healthcare industry, Biotech companies are very good examples of defensive stocks. Historically, biotech stocks were less impacted by economical downturns, while more affected by the companies’ own clinical trials and business developments.

In what way would you advise investors looking toward overweighting biotech stocks in their portfolios?

Although biotech stocks have been performing well in general so far, investors should be aware of the inherent risks involved with biotech investing. Biotech stocks, especially those still in development stage with no approved products on the market, are very volatile and unpredictable sometimes because their valuation are mainly driven by clinical trial results and business developments.

If investors want to overweight biotech stocks in their portfolio, we always suggest they look at three factors: pipeline, technology and cash position. If a biotech company has a decent pipeline, or even already has approved products on the market with good potential; if the company has a platform technology to derive multiple drug candidates down the road, and the company has rich money to advance its pipeline, then it may be worth adding it to the investor’s portfolio.

Grant Zeng, CFA is a senior analyst covering the biopharmaceutical industry for Zacks Equity Research.
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