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.