Biotech revisit

US Stocks

Just as genomics is the attempt to decipher all the genes in an organism, proteomics, in its simplest definition, aims to uncover all the proteins and their functions. Since genes are the blueprints for proteins, which in turn are the main players in most of the body's functions, it is a logical progression. Indeed, there is no mistaking what proteomics promises - a revolution in medical science with implications that far surpass those of genomics.

Sounding like the genomics guru of yesteryear. Proponents of proteomics declare that an understanding of proteins will reveal the underlying mechanisms of disease, leading drug makers to treatments that would remove causes rather than mask symptoms. Doctors will be able to tailor treatments to specific patients.

For all its promise, proteomics remains strapped by limitations. The technologies to isolate and characterize proteins are still cumbersome. But the completion of the human genome does give it a starting point. Many new technologies have sprouted in the past few years that make it easier to find and identify proteins. The following are companies that are involve in proteomics:

Celera Genomics Group(CRA US US$25.60, CSFB rating : Buy) - they brought you the first assembly of the human genome, and are trying to repeat the feat on proteomics.

Myriad Genetics(MYGN US US$44.94 CSFB rating Buy) - develops and commercializes genes involved in major common diseases including cancer, cardiovascular disease. Its ProNet technology is used to identify proteins that may lead to the development of new therapeutics.

Applied Biosystems Group(ABI US US$27.05 CSFB rating Buy) - develops and markets analytic instruments to the life science industry.

US Technology

On a week-on-week basis, the NASDAQ Composite Index retraced 1.8% to 1671.

Despite a 96% drop in profits, Intel Corporation (INTC US $24.15 CSFB rating: HOLD) met lowered expectations for 3Q01. Intel earned $106 million during the September period versus the comparable period last year of $2.51 billion. 3Q01 EPS (excluding acquisition costs) of $0.10 a share was inline with analyst expectations. Sales slipped 25% to $6.5 billion from $8.7 billion. Given the state of the economy and the slow pace of sales, it was inevitable that the firm underwent a tough quarter. To add, Intel noted that its profits may continue to be weak in the chip business due to the ongoing aggressive price war with rival Advanced Micro Devices (AMD US $9.19 CSFB rating: BUY). Looking ahead, Intel said it expects its revenues for the fourth quarter to remain weak (between $6.2 billion and $6.8 billion). With the Windows XP coming, the company's latest generation Pentium 4 chips and the upcoming holiday shopping season, we believe these events may help Intel to maintain its market share and revenue growth. For investors with at least a 12-month investment time horizon, we suggest accumulating the stock only on price weaknesses below $23.00.

EMC Corporation (EMC US $11.51 US CSFB rating: BUY) posted 3Q01 sales that fell 47% to $1.21 billion from $2.28 billion a year ago. EPS (excluding restructuring charges) of -$0.12 a share was bigger than the anticipated loss of -$0.05 a share. EMC suffered from reduced demand due to the slowing economy, IT spending weaknesses, and market share loss to IBM (IBM US $102.65 CSFB rating: HOLD), and Hitachi Ltd (HIT US $72.50).

As a consequence, EMC is taking steps to cut costs. EMC announced it would lay off another 4,000 people from its workforce in addition to the 1,600 previously announced (by the middle of 2002) and save about $800 million a year. Though the company expects to return to profitability in the second half of 2002, we believe the road will be an uphill task given the uncertainty with when IT spending will resume and the increasing competition within the storage network market. Given the present slack demand and price war with rivals like IBM and Hitachi, we do not recommend investors to buy into this distressed stock yet.

Europe

Apparently in judging the outlook for equity prices investors need to wonder what news is reflected in the current prices. Given the weak figures and the clouded outlook for the next 1-2 quarters the reaction of stock prices of the companies that reported either earnings or sales figures last week might convey the message that investors are prepared to wait and look for a recovery in 2H02. For the time being we tend to agree with the time horizon. However, we expect the coming quarters to reflect a bottom-building period with high volatility and range trading. We believe that markets are currently trading at the higher end of the band as investors' optimism has reached levels close to mid-May and end-July, when markets started a period of weakness. Investors should be aware that, in our view, expectations for earnings growth continue to be too high for the coming months. Consequently, further earnings revisions are in the cards, leaving the potential for disappointments high. We recommend investors buying in weakness and lightening up on positions after a rally.

The amount of bad news clearly outweighed the good news. This applies for the macro data as well as for corporate data. Germany, which is the biggest European economy, accounting for about one third of European GDP, continues to act as a brake to the European economy. The German IFO business climate index for September fell from 89.5 to 85, well below the expected 88.4, which is the biggest drop since the oil crisis in 1973. Additionally the German Finance minister Eichel lowered Germany's growth forecasts by half for this and next year to 0.75% and 1%-2% respectively.

Corporate news continues to remain poor, underlining our cautious forecast. Technology companies mostly reported earnings in line with very low forecasts and extended the period of low visibility well into 2002 while others reported below forecasts (LVMH, Clariant, SAP, CMG, Thompson Mulitmedia, Pearson) or issued profit warnings such as ING. Nokia was once again the only bright spot but even these figures showed signs of weakness.

Philips (PHIA NA; EUR 23.93) reported poor 3Q01 figures and lowered guidance for 4Q01. The company posted a 3Q loss of EUR 453 million before restructuring charges. While this was broadly in line with CSFB's estimates it was the level of charges for the semiconductor and LCD division that made the overall result fall short of expectations. Philips now expects to break even operating profit in Q4 (CSFB; profit of EUR 90 million) and is looking for a net loss before restructuring of EUR 200-250 million (CSFB; EUR -100 million). Philips sees first signs of an improvement in the semiconductor book-to-bill ratio in 4Q01. We remain cautious as we see no immediate rebound in the industry but admit that the compelling valuation relative to its peers keeps the stock attractive from a long-term perspective. Philips offers the highest restructuring potential among European technology stocks.

STM's (STM FP EUR 29.71) earnings report was broadly in line with expectations and managed to beat the consensus by one cent. 3Q01 EPS was USD 0.04 while gross margins were in line with expectations at 33%. However, overall the third quarter was very weak and resulted in a drop of net profit of 91%. STM did not sound too upbeat on the outlook for Q4 and was unable to make forecasts for 2002. The company expects Q4 to be in line with Q3, which is below expectations. Analysts were looking for a slight improvement in sales and profits. We continue to view STM as the best play for the next semiconductor upcycle.

Nokia (NOK1V FH EUR 22.18) reported earnings at the top end of the guidance range of EUR 0.14-0.16. Nokia's good results reflect a strong handphone business but a weak infrastructure business. Margins, sales and profits in the handphone unit were well above expectations while the infrastructure figures were well below, which explains Friday's drop in Ericsson, Alcatel etc. Nokia's outlook was rather promising, expecting Q4 handphone sales to increase 25% vs. 3Q while a return to the overall, long-term sales growth target of 25%-30% is expected some time next year. However, the recovery in the network division will have to wait a little longer as sales are not expected to improve before 2H01. We continue to believe that Nokia is by far the best-positioned company in the equipment industry. However, after the recent gains we believe that investors will get the opportunity to buy the stock a little lower.

Roche (ROG VX CHF 115.25) reported an increase in sales of 7%, which was in line with expectations. However, the company made some cautious remarks on their forecast for financial income in 2H01 and said that the launch of its hepatitis drug Pegasys will be delayed. In this respect Roche expects EBIT to be at least at the level of last year. Overall the report was slightly disappointing. After the nice rally over the last few weeks we expect some profit taking. Roche will take some more time to convince the market that its product pipeline is strong enough to offset the patent expiry of products such as Rocephin and Roaccutane.

SAP (SAP GY EUR 112) was the big disappointment of the week. The company that only weeks ago confirmed that it was on track to meet its sales growth target of 20% fell short by a wide margin. While the consensus for 3Q01 EPS was in the region of EUR 0.45 SAP posted only EUR 0.25. This is even below the very weak 3Q of last year (EUR 0.28). SAP had to revise its sales forecast for the year to 15% from 20%. The main shortfall in SAP's earnings report stems from the license revenues as the company suffers further order delays. We do not believe that this is a competitive issue. Since SAP's license revenues fell 'only' 7% in Q3 compared to Siebel's decline of 37% we still see SAP gaining market share. Since sales are up 23% over the first nine months of the year, it implies that license revenues will decline by 15% in Q4. This comes mainly as a result of the order delays in the US that SAP is now facing in line with other competitors.

SAP remains extremely well positioned in the global software market and we believe that the current weakness will offer a buying opportunity, should the stock weaken further to about EUR 100. CSFB sees downside in the stock of EUR 90, which would reflect an attractive valuation level of 30x P/E02E.