* Says Gilead Sciences is favorite large-cap
* Likes Ardea Biosciences in small and mid-cap space
* Sees number of takeover possibilities in biotech
* Says Ardea, BioMarin, Celgene attractive takeover targets
By Suzannah Benjamin
BANGALORE, July 6 (Reuters) - Biotechnology stocks are likely to thrive once the final shape of U.S. healthcare overhaul becomes clear, a portfolio manager for a biotechnology-focused fund said.
“When President Barack Obama released his budget proposal in February, he included a number of proposals that were viewed as negative for the healthcare sector, particularly the biotechnology sector,” said Evan McCulloch of Franklin Biotechnology Discovery Fund (FBDIX.O).
Stocks have sold off on concerns about the possible negative impact of healthcare reforms, McCulloch said, but the selloff has also produced an opportunity in biotech stocks that now offer attractive valuations and little downside.
“We look at the proposals for healthcare reform and we don’t think anything in there is onerous to the biotechnology sector,” he said.
Obama’s U.S. healthcare plan aims to provide medical coverage to most of the 46 million Americans who currently lack it.
While expanded coverage could expand the market for biotech companies’ products, it could also lead to price cuts and other cost controls.
The fund’s favorite large-cap and its largest holding is in Foster City, California-based Gilead Sciences Inc (GILD.O).
As of March 31, the fund held 701,700 shares of Gilead with a market value $32.5 million.
“Gilead Sciences is our number one position for a reason,” McCulloch said. “The bulk of their business is in HIV, a product category very well insulated from any sort of managed care reimbursement pressure from healthcare reform.”
HIV patients tend to be young, employed and covered by private insurance, limiting HIV drugs’ exposure to Medicaid and Medicare programs, he added.
In the first quarter, sales of the company’s AIDS drug Truvada rose 23 percent. Sales of the newer Atripla, which combines Truvada with Bristol-Myers Squibb Co’s (BMY.N) Sustiva into a single pill, jumped 57 percent in the same period.
The fund also significantly increased holdings in Amgen Inc (AMGN.O), the world’s largest biotechnology company, due to an improving outlook for the company.
McCulloch expects positive Vectibix late-stage data in first line colorectal cancer, approval of denosumab for osteoporosis, and favorable late-stage results for denosumab in bone-related events in breast cancer.
However, he said the fund has reduced its weighting in Biogen Idec Inc (BIIB.O) on diminished prospects for the company’s multiple sclerosis drug Tysabri.
Global sales of Tysabri in the first quarter totaled $227 million, short of the $246 million analysts had expected. Sales of the drug have slowed after it was linked to a potentially deadly brain infection known as progressive multifocal leukoencephalopathy, or PML.
In the small and mid-cap space, McCulloch likes Ardea Biosciences RDEA.O, whose portfolio of product candidates include an HIV inhibitor and a compound for the treatment of gout, which he believes to be the real value driver.
The gout drug, which is currently in mid-stage clinical trials, has shown substantial reductions in uric acid and has overcome the efficacy hurdle.
The Franklin Biotechnology Discovery Fund held Ardea shares worth $1.5 million as of March 31.
The fund, which manages about $350 million across all asset classes, has risen about 98 percent since its inception in September 1997.
The fund, which follows the Nasdaq Biotechnology index .NBI, was down 15.5 percent including sales charges in the 12-month period ended May 31, 2009.
The index was down more than 14 percent in the same period.
So far this year, the fund was down 7.8 percent including sales charges as of May 31, while the index had fallen 4.3 percent.
“We’re always pleasantly surprised by M&A but it’s not the formation of any investment thesis on any individual positions,” McCulloch told Reuters.
However, he believes difficulty in raising money has put a lot of pressure on smaller companies to sell, and there are a number of potential takeovers in the biotechnology sector.
“I think there are some very attractive potential marriages,” McCulloch added, naming Ardea Biosciences, BioMarin Pharmaceutical Inc (BMRN.O) and Celgene Corp (CELG.O) as attractive acquisition targets. (Editing by Aradhana Aravindan)