The 3G of biotech

The three biotechnology companies I follow all reported 1st quarter results in the last couple of weeks. How do I rank their performance at the moment?

1= Gilead
1= Genzyme
3 Genentech

Gilead

GILD has a huge amount of momentum at the moment with its HIV drugs. In Q1 its HIV sales grew 56% to $700 million. Its drug cocktail Atripla is rapidly becoming the number one treatment for newly diagnosed patients. It also has a new HIV drug under development which is about to enter Phase III trials.

GILD's 'flu drug Tamiflu is providing a growing income stream and sales of their Hepatitis B drug grew 35% to $71 million in the first quarter.

To cap it all off GILD has a new drug for the treatment of PAH under review by the FDA with the result due on June 18, as well as a Cystic Fibrosis drug in Phase III trials.

Analysts were estimating earnings of $3 for 2007 but as GILD earned $0.93 in Q1 full year earnings could be closer to $4. That would put GILD on a 2007 PE of 21 - not bad for a company that just grew revenues at 48%!

Genzyme

What is there not to like about GENZ? The drugs may be obscure but revenues are growing at a 20% rate and margins are tightening as GENZ leverages its scale.

Management are extremely bullish about the future, recently stating that they could double their revenues in five years based on their current drugs alone. Behind the current drugs is a strong pipeline including a C-difficile drug in Phase III trials, a tranplant aiding drug in Phase III trials and a viscosupplement drug also reaching the end of its Phase III trials.

GENZ have just raised 2007 guidance to $3.25. Using a growth rate of 20% a PEG of 1 would value it at $65 - right where it is now. However EPS growth should be above 20% as margins are increasing. Either way a 2007 PE of 20 seems cheap for a company of the quality of GENZ.

Genentech

Genetech is the big boy of the three, with Q1 revenues of $2.8 billion. Earnings increased 60% in the last quarter but the share price is going nowhere. The reason is the pipeline. There are no new drugs on the immediate horizon, just expansions of the uses of the current drugs. Avastin has been so successful it is almost making DNA look like a one trick pony.

The pipeline is particularly difficult to understand thanks to Sue Hellmann's love of jargon. I quote from the recent conference call: "We anticipate that event-driven regular interim analysis will begin in 2007 in the Phase III adjuvant colon cancer study, NSABP C-08." A sentence you may need to read more than once!

DNA is probably good value at $80 but it may be worth waiting for more multiple contraction before buying in.

My time is up. My opinion of large biotechs is unchanged - at these levels they offer a compelling risk - reward ratio.