Best on the Street Stock Analysts: Pharmaceuticals Pharmaceutical companies depend on bringing new therapies to market to maintain and expand their business, but developing new drugs is risky and unpredictable. That makes assessing drug makers' prospects difficult.
The No. 1 analyst in the pharmaceutical sector, Andrew Vaino of Roth Capital Partners, brought a pharmaceutical researcher's eye to his smart bet on Micromet Inc. For most of the year, he rated the company a buy because he liked its approach of using the body's immune system to attack cancer cells. Strong preliminary test data bolstered his support for the science.
Micromet returned 50% during Mr. Vaino's buy rating. By the end of the year, the stock had become so highly valued that he downgraded it to a hold. While he had a hold on the stock, it gained 1.7%.
Mr. Vaino, 40 years old, has a doctorate degree in chemistry. He spent five years discovering new drugs at biotechnology firms. When picking stocks, he looks hard at the molecules companies have under development as well as the science behind the medical conditions that the compounds aim to treat.
"Molecules can't lie," Mr. Vaino says. "You can tell a lot about a drug's potential success based on the structure" of the compound and the data from clinical trials.
In the case of Synta Pharmaceuticals Corp., Mr. Vaino had to dig to find the molecular structure for a cancer agent being developed by the company, known as STA-9090.
He had downgraded Synta's stock to hold in February 2009, after the company suspended a study of another drug candidate due to safety concerns.
He reviewed patent applications for STA-9090 and was able to estimate its shape, weight and size. His experience in medicinal chemistry suggested its relatively small size might help it perform better than similar agents, developed by other companies, that had failed. In November, he upgraded the company to a buy. The stock returned 104% for the parts of the year he recommended it.
For two stretches, Mr. Vaino had a buy rating on Medivation Inc. He was impressed by the results of Phase II testing for an Alzheimer's treatment called Dimebon. The stock climbed 104% for the parts of 2009 that Mr. Vaino recommended buying it.
Mr. Vaino acknowledges that his approach isn't foolproof. In March 2010, Medivation shares plunged, after the Alzheimer's drug fared poorly in a Phase III study.
Mr. Vaino believes innovative drug companies will bounce back in 2010, after faring worse than the overall market last year, given their history of performing well compared with stocks generally. "People are still going to get deathly ill, so at some point, [the] stocks are going to snap back," he says.
His current favorite is Chelsea Therapeutics International Ltd., which he rates a buy. Mr. Vaino believes investors wrongly punished the stock in the fall, after the company released disappointing data from a Phase III trial for its lead product, Northera, which aims to treat a condition causing drops in blood pressure.
Mr. Vaino believes Northera, which is already approved for use in Japan, will prove its worth in other studies, and sees "a lot of room" for Chelsea shares to rise.
—Jonathan D. Rockoff
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