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7-Business: Morgan Stanley cuts rating on biotech sector

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TITLE:  Morgan Stanley Cuts Rating on Biotech Sector
SOURCE: TheStreetCom, USA
DATE:   May 21, 2003

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Morgan Stanley Cuts Rating on Biotech Sector

Biotechnology stocks have enjoyed a nice run over the past few months,
and now Morgan Stanley says that means investors should take some profits
from the sector.

The firm issued a research report Wednesday morning, downgrading the
biotech sector to in-line from attractive. Morgan Stanley said the
majority of the companies it follows are at or near its 12-month price
targets, and that it's "time to take some money off the table."

An in-line rating means that Morgan expects the industry to perform on
par with its relevant broad market benchmark over the next 12 to 18 months.

Morgan pointed out that since the start of 2003, the Nasdaq Biotech Index
is up 21.4% and the Amex Biotech Index has climbed 19.9%. By comparision,
the Nasdaq has gained 11.6% and the S&P 500 has risen 4.5% over the same

"While there are still a number of near-term positive catalysts for the
sector, with the likely approval of four additional drugs in the next two
months, strong [second-quarter] earnings ... and continued supernormal
growth, we believe that valuations are beginning to reflect this
reality," the firm's research note said. "Growth rates are beginning to
slow for the large-cap sector going into the latter half of 2003 (tougher
comps and maturing products) and beyond."

Even though fundamentals have "significantly improved" over the past
year, with current valuations "we struggle to find stocks that we believe
can meaningfully outperform the broader market in the near term."

Additionally, Morgan said that the summer months are usually weak for the
biotech sector as news flow tends to slow.

Morgan noted that the biotech sector has seen five drugs approved this
year, and that as many as 16 new products might be given the green light
by the time 2003 comes to an end.

"This strong number of new products (which drive the next profit cycle)
keeps us from moving to a cautious industry view and could lead to an
upgrade of the sector if valuations come in, but we believe that much of
this good news is priced into the stocks at current levels," the firm said.

The biotech rally has rewarded many names in the sector, including lower-
growth and higher-risk names, Morgan said. The firm indicated that it was
suggesting investors stick with "high quality, later-stage biotech names
with solid top- and/or bottom-line growth."

Specifically, Morgan said it continues to believe investors will be
better off with Amgen (AMGN:Nasdaq - news - commentary - research -
analysis) and Gilead (GILD:Nasdaq - news - commentary - research -
analysis) among large-cap stocks. Morgan was also positive on Medicines
Co. (MDCO:Nasdaq - news - commentary - research - analysis) , despite
"some near-term risk on manufacturing." The firm said it believes "the
underlying fundamentals of the business remain strong" at Medicines Co.

For investors willing to assume more risk, Morgan said it favors
Atherogenics (AGIX:Nasdaq - news - commentary - research - analysis),
Human Genome Sciences (HGSI:Nasdaq - news - commentary - research -
analysis) and OSI Pharmaceuticals (OSIP:Nasdaq - news - commentary -
research - analysis).

In short, Morgan said "we view ligtening up on the sector as prudent,
given current valuations." The firm said investors should use any
momentum from near-term positive news that comes out of the American
Society of Clinical Oncology meeting or additional Food and Drug
Administration approvals as an opportunity to rotate some money out of
the sector.



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