Biotech stocks tacked on additional gains last week and rose to five-month highs while big pharma investors positioned themselves ahead of a flurry of third-quarter earnings reports. The Nasdaq Biotechnology Index closed the week up 1.9%. The Amex Pharmaceutical Index ended flat for the second straight week.

Federal health regulators approved a new indication for cancer drug Avastin but shares of Genentech ended the week slightly lower as investors were disappointed with third-quarter sales. On Wednesday, the U.S. Food and Drug Administration cleared Avastin as a treatment for non-small cell lung cancer, the most common form of the disease. Earlier in the week, Genentech reported third-quarter earnings above Street estimates, but sales of key cancer drugs Rituxan and Herceptin came in lower from the prior quarter while Avastin came in below the Wall Street consensus estimate. Rituxan is co-marketed by Biogen Idec.

Shares of New River Pharmaceuticals rocketed to a 75% weekly rise after the company and developmental partner Shire said they received an approvable letter from the FDA for NRP104, an experimental treatment for children with attention-deficit hyperactivity disorder. W.R. Hambrecht raised the price target on the stock to $50 from $42 on Oct. 11. The following day, the research firm raised the target to $59 after New River disclosed "astonishingly favorable profit splits" with Shire, which will receive just a third of profit from U.S. sales. "In our view, it cannot get much more visible than this, which is why it is not too late to buy New River shares."

Merck announced a delay for experimental insomnia treatment gaboxadol on Friday but shares closed the week higher as investors took positions ahead of third-quarter earnings and expected FDA approval of new diabetes drug Januvia. Merck and developmental partner Lundbeck said it expects to file for approval of gaboxadol in the middle of 2007 rather than the first quarter of 2007 as previously expected. Morgan Stanley said on Oct. 10 investor attention may be focused on sales of recently launched Gardasil, a vaccine for human papilloma virus, or HPV, the leading cause of cervical cancer. "We remain very comfortable in our long term projection of more than $2.0 billion but the slope of the curve will be tricky to get right," the firm said. Morgan Stanley maintained an "overweight" rating on the stock. "We continue to view Merck as one of the most attractive names in the sector long-term, and we expect it to continue its slow and steady climb," it said. "If management meets its targets, Merck will be worth well over $60 over the next several years."

Genzyme reported third-quarter earnings slightly above analysts' consensus estimate last Thursday morning. The Cambridge, Mass.-based company posted a profit of 73 cents per share, excluding several one-time items. The Wall Street forecast called for earnings of 71 cents per share. Shares closed Thursday down 1.6%. Bear Stearns said it was a strong quarter but investors appear concerned with competition for Synvisc, an arthritis treatment, as well as dialysis drug Renagel. "We believe the Street is ignoring Genzyme's pipeline," said Bear Stearns. The firm has high expectations for new drugs Tolevamer and Mozibil and new indications for Renagel and Myozyme. "We believe none of these opportunities are fully captured in Street estimates, creating perhaps the best 12-month risk/reward in biotech," it said.