Biotech Stocks and ETFs: Should You Board the Biotech Bandwagon Now?

Sugar Land, TX
July 27, 2009

July has been a good month for biotech investors. Share prices in the biotech sector as measured by the NYSE Biotechnology Index are up 24% compared to the 6.6% gain for the S&P 500. Earlier in the month, Amgen (AMGN) reported better-than-expected results from a trial of its experimental bone-protecting drug denosumab in patients with advanced breast cancer. Amgen's shares vaulted 16% on the news.

In the week just ended, the momentum in biotech shares has continued further. While a host of favorable clinical trial results was the bigger driver, a large buyout announcement added the icing to the cake.

Clinical Trial Results

Bringing back memories of the dotcom era, shares of Human Genome Sciences (HGSI) rose nearly 300% to $12.50 a share after the company reported favorable results for its experimental lupus drug Benlysta. Targacept (TRGT) shares more than doubled to $7.25 a share after its depression drug candidate met its goals in a mid-stage trial. Onyx Pharmaceutical (ONXX) reported encouraging results for its breast cancer treatment Nexavar to push its shares higher by 21%. Shares of Celgene (CELG) jumped nearly 16% after the company announced significant improvement in progression-free survival of patients taking Revlimid as a first-line treatment for multiple myeloma.

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Buyout

Continuing the trend of major pharma-biotech mergers, as in Roche (RHHBY.PK)-Genentech, and Eli Lilly (LLY)-ImClone, Bristol-Myers Squibb (BMY) announced it is buying Medarax (MEDX) for $16 a share. The Medarex takeover implies a net price tag of over $2 billion. Medarax shares jumped nearly 90% on the announcement.

Is it too Late to Board the Biotech Bandwagon?

Given strong gains in biotech shares in recent weeks, it is logical to ask if it is too late to get on the biotech bandwagon. I believe the answer, generally speaking, is no. Notwithstanding uncertainties surrounding health care reform, the fundamentals for biotech companies are reasonably favorable. Yet, one needs to take appropriate care in getting the timing right and in choosing proper investment vehicles.

Fundamentals

Several factors favor the long-term growth of biotech companies. These include an aging population, rising incidence of cancer and other degenerative diseases, and growing recognition that biotech products offer the best solutions for management of these diseases.

Several biotech drugs like Roche's Avastin and Amgen's Enbrel have the potential of becoming major blockbuster drugs by 2014. Biotech companies are seeking to expand uses of their approved drugs to treat more diseases. And, unlike drugs made by major pharmaceutical companies, biotech drugs are to a degree insulated from generic competition. Major pharmaceutical companies are also actively working to strengthen their biotech forte and increasingly acquiring biotech companies for their intellectual properties.

Timing

Equity prices have been strong across the board since the market bottomed on March 9 and the S&P 500 is up nearly 46%. Biotech shares are no exception. The market as well as biotech shares could be due for a pull-back. From a timing standpoint, it makes sense to put money to work in the biotech sector on a pullback.

Investment Vehicles

Stocks of established biotech companies like Amgen, Biogen Idec (BIIB), Genzyme (GENZ), and Gilead Sciences (GILD) typically move with little correlation to the broad market. That said, such shares carry some degree of event risk. Adverse results from key drug development efforts can cause such shares to swoon in a jiffy. As such, they may only be suitable for investors with well-diversified portfolios.

Smaller biotech companies often promise riches based on the success of one or two key drugs. They carry a high degree of event risk as failure in pivotal drug development activity can quickly break a company. Only the most risk-tolerant investors usually tend to court such shares.

Bundled products like biotech sector funds and ETFs are better suited for most investors since they reduce most of the event risk. And, there are plenty of biotech sector funds and ETFs to choose from. Investors looking for no load mutual funds can consider Fidelity Select Biotechnology (FBIOX) or Rydex Biotechnology (RYOIX).

In the ETF space, iShares Nasdaq Biotechnology (IBB) and SPDR S&P Biotech (XBI) are among the more popular ones. Investors looking for a global investment vehicle can look at PowerShares Global Biotech (PBTQ).

Aggressive traders looking for explosive short-term returns can turn to Biotechnology UltraSector ProFund (BIPIX). This mutual fund uses leverage to boost returns.

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