Over the past four years, early October has been a good entry point for biotech stocks. It could be that investors will now discover this trend and add to biotech positions earlier. Whether you are a trader or an investor, look for seasonality and momentum in the market.
2007 YTD has been a mixed year for biotechnology, with the broad-based iShares NASDAQ Biotechnology Index flat but the larger cap SPDR S&P Biotech up about 10% despite a weak June. The biotech sector peaked in early May as usual, prior to the ASCO meeting.
In other ETF (exchange-traded funds) action, the more volatile PowerShares PBE is up 5%. BBH Holders, which has fixed larger-cap positions and does not rebalance, is actually down YTD due to overweighting in revenue leaders Genentech and Amgen. XBI outperformed other ETF’s due to concentrated positions in Celgene, Cephalon, Digene, Gilead, MedImmune, and Imclone. For example, top-tier stock Gilead has continued to roll up 25% YTD.
Acquisitions remain a dominant theme, and big buyout winners such as Medimmune, Digene, Cytyc, and Biosite contributed to overall positive biotech sector performance in 2007. Recently, Roche made a hostile bid for Ventana Medical Systems, a tissue-based diagnostic company, boosting the stock over 40%. This takeover play sparked a move up for several other diagnostic stocks so it appears synergy between therapeutics and diagnostics is in again.
A flurry of ETF’s was launched that contributed to demand for life science stocks, such as the 18 HealthShare funds (HHD, HHK, HHE, etc.) that offer investments in a variety of disease subsectors from cancer to pulmonary. The slicing and dicing may be a bit too much as the shares are thinly traded.
In the mutual fund universe “pure play” Fidelity (FBIOX) barely broke even due to concentrated positions in laggards Genentech, Amgen, and Vertex Pharmaceuticals. Another biotech fund by Franklin (FBDIX) was up only about 3% due to a several overweighted stocks taking big hits.
A more conservative healthcare investment strategy is to invest in a more diversified multicap Health Science Fund such as BlackRock (SHSSX), which is up about 8%, and T. Rowe Price (PRHSX), up about 9%. These funds have a diversified mix of biotechs, pharmaceuticals, and devices. The Lipper Health/Biotech Fund Index of 10 funds is up 6.15% YTD.
One disconcerting fact about biotech investing is that the variation in return from funds and ETF’s can be from 0–10% YTD, quite large for a $75-billion business sector. The difficulties of developing new drugs are becoming well known and is reflected in stock volatility. The genomic age may be here, but human biology and its complex networks still involve a lot of trial and error.
A good strategy for nontraders is to invest in a mix of Life Science and Healthcare funds, especially ETF’s for the bulk of your portfolio, and allocate about 25% or less to stock picking. The large performance difference among the biotech funds and ETF’s demonstrates the volatility of the sector usually due to clinical and regulatory news. At the beginning of the year I forecasted a 10% return in 2007 for biotechnology investments and depending on your stock mix, a 5%-plus return YTD was achievable.
Two of the primary drivers for biotechnology stocks continue to be M&A and regulatory milestones. The July 2 issue of Biocentury has a summary of 2H regulatory milestones. A detailed list of products currently in Phase II and III trials is also available from Engel Publishing Partners through their eKnowledgeBase database.
I screened over 50 small- and mid-cap biotech stocks that have strong technology and IP, adequate financing, and a broad pipeline that has the potential for positive clinical results over the next few quarters.
We all know that there is risk of clinical trial failures, so it is important to have a diversified portfolio. I identified many companies that can potentially move up to the next tier or become acquisition targets and have summarized 11 in the Table. All have technology that has been validated to some extent by strategic partners but have the potential for new collaborations.
Choose your entry point carefully and monitor the stock performance using charts and technical indicators.