Amgen, Genentech, Celgene among Merrill's picks for a rally, report says

By Jennifer Chiou

New York, Oct. 17 - The decline in the AMEX Biotechnology Index has created a good entry point for several biotech stocks and the sector is late in the recent bull cycle based on trading patterns, according to Merrill Lynch analysts Eric J. Ende, David W. Munno and Thomas J. McGahren in a biotechnology update.

The analysts noted sector rotation away from high-beta sectors in explaining the index's drop since Oct. 4, but added that the decline provides a prime opportunity to purchase Merrill's top picks for a rally, including Amgen Inc., Genentech Inc. and Celgene Corp. for the large caps.

Merrill also touted mid-cap stocks OSI Pharmaceuticals Inc., MGI Pharma Inc. and Protein Design Labs Inc. as well as small caps Cubist Pharmaceuticals Inc., Theravance Inc., Abgenix Inc., New River Pharmaceuticals Inc. and Keryx Biopharmaceuticals Inc.

Ende, Munno and McGahren cited Amgen's strong business momentum as its supportive cancer business has exceeded 2005 expectations. The report also noted increased usage of the company's Aranesp, Neupogen and Neulasta due to encouragement from a government demonstration project. Merrill said its price target for Amgen is $104.00 based on a price/earnings to growth ratio of 1.6 times its 16% five-year growth rate off a 2007 earnings-per-share estimate of $4.07.

The analysts said Genentech reported strong third-quarter earnings, which were highlighted by the expedited adoption of Herceptin for breast cancer and Avastin for breast and lung cancers. Merrill added its $103.00 price target for the company is based on a price/earnings ratio of 40 times its 2007 earnings-per-share estimate of $2.55.

For Celgene, the report placed emphasis on the company's potential blockbuster franchise in Revlimid for myelodysplastic syndrome and Thalomid for myeloma and other cancers. Merrill said its price objective is $65.00, which is based on a price/earning ratio of 49 times its 2007 earnings-per-share estimate of $1.60, discounted back one year at 20%.

The report said OSI Pharma's underlying fundamentals are intact following negative news related to its proposed acquisition of Eyetech Pharmaceuticals Inc. In addition the European launch of Tarceva will help investors focus on the company's core business. Merrill added its price objective of $51.00 is based on a price/earnings ratio of 33 times the fully taxed 2008 earnings-per-share estimate of $1.56.

Merrill's MGI Pharma price objective is $28.00, which is based on a price/earnings multiple of 33 times its 2007 fully taxed earnings-per-share estimate of $0.66, and a $28.00 price target for Cubist. The report forecasts Cubist's Cubicin sales could peak at $350 million to $450 million.

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