JP Morgan bets on large biotechs to beat recession

By Varsha Tickoo and Esha Dey

BANGALORE, April 3 (Reuters) - J.P. Morgan is betting that healthcare stocks, especially in the biotech sector, will weather a U.S. recession and outperform the broader market over the next six to 12 months as they do not depend on consumer spending.

But the brokerage prefers large biotechnology companies over small- and mid-sized firms, it said in a conference call discussing its equity strategy.

The brokerage, which is bullish about healthcare stocks as a whole, said the sector historically outperforms the broader market during a recession.

"Health Care has outperformed the S&P 500 in every one of the past five recessions," JP Morgan said.

The AMEX Biotechnology Index .BTK has fallen only about 3 percent this year, while the broader S&P 500 Index .GSPC has lost almost 7 percent.

JP Morgan said despite large biotech stocks performing strongly in 2008, they seem cheaper than smaller companies' shares.

The brokerage said Genentech DNA.N, Celgene (CELG.O) and Gilead (GILD.O) were its preferred choices, or "three horsemen," in the big-sized biotech segment.

JP Morgan expects revenue at all three companies to rise more than 5 percent in 2008. It rates all three stocks "over weight."

The brokerage expects the momentum that fueled Genentech's stock rally of 19 percent this year to continue, with various label expansions in the offing in 2008.

JP Morgan was bullish on Celgene, whose market value has jumped by more than a third this year, and said it expects the company's cancer drug Revlimid's sales to beat market estimates in 2008.

The brokerage was also positive about the company's blood disorder drug Vidaza, acquired through a buyout of drug company Pharmion Corp.

The rosy view on Gilead, whose shares have risen 13 percent in 2008, was based on the brokerage's expectation of strong 2008 sales. JP Morgan said sales of the company's two HIV drugs, Truvada and Atripla, could beat Wall Street estimates.

DRUGS, DEALS IN FOCUS

Mergers and acquisitions (M&A) in 2008 may reduce compared with last year, and as investors increasingly shy away from riskier bets, small- and mid-sized stocks could be hit, the brokerage said.

"We believe poor share performance despite improved earnings outlooks clearly demonstrates the insignificance of earnings and even revenue for small- and mid-sized biotechs, especially in a challenging macro environment," JP Morgan said in a note.

Clinical concerns and M&A speculation more significantly affect share performance of the companies, it said.

However, the brokerage said United Therapeutics (UTHR.O) and OSI Pharmaceuticals (OSIP.O) are two stocks that could shine.

The brokerage rates United Therapeutics as its top pick among the smaller biotechs, and saw the current weakness in the stock as a buying opportunity. Shares of United Therapeutics have fallen about 10 percent in 2008.

JP Morgan said concerns over final approval for the company's lung disease drug, Viveta, which succeeded in a trial late last year, were baseless.

On OSI Pharma, which has a lung cancer drug, Tarceva, on the market, JP Morgan said it expected a potential rival drug from AstraZeneca (AZN.L) to fail a late-stage trial, which could help OSI Pharma's shares.

The brokerage also said it expects two upcoming clinical trials of Tarceva in other cancer settings to be positive.

OSI Pharma has lost more than 20 percent of its market value this year.

The brokerage said biotech stocks generally hit the bottom at the beginning of a slump, but tend to recover later.

"We do think there is still money to be made in small- and mid-cap biotech (stocks), but we stress patience and selectivity," the brokerage said. (Editing by Pratish Narayanan)