Large Cap Biotech

We're going to do a short series comparing three large cap biotechs: Genzyme, Genentech,and Amgen. Celgene was in the mix at first, but due to an extremely high p/e (relatively) celgene is more of a momentum stock right now. This analysis is for you investors looking for a good company with good, but not out of this world, growth. If you want out of this world, check out Potash. Since it was recommmended here at 122 in January it has proceeded to run to 197. That should more than make up for the 12% loss in Apple!

Generally, during recessions we see large revisions of forward earnings estimates. Consequently, stocks that seem “cheap” based on forward growth are in reality far from it. However, I believe biotechnology companies, such as these, who already have established cash flows to be relatively “recession-proof.” Perhaps, smaller biotech companies who have yet to create profit and need large influxes of capital may see tougher times ahead as the credit markets tighten significantly. But, these three companies can afford to pay for their R&D with their own cash. For this reason, I am not too concerned about overstated forward estimates. This leads me to relatively trust the forward PEG rates of each company, which are all essentially 1.

It is interesting to note the disparity in pipeline treatments. Genentech has a significantly larger portfolio of drugs awaiting approval, especially in Phase 3 Trials. Yet we notice that the pipeline size is directly proportional to the market capitalization of the company. In order for Genzyme to sustain a 20% growth rate with its $80 billion market cap, Genentech needs to have a significantly larger pipeline than Genzyme, which needs 20% growth rate of only a $20 billion market cap. So can Genzyme sustain this growth rate?