The 2005 bull market in biotechnology stocks continued to run through the end of February. Biotech stocks tend to do well in the November–February time frame, and 2006 has great momentum so far. Driving this strength are a number of fundamental factors, such as M&A, overall market strength in small- and mid-caps, earnings growth, new product milestones, and increased weighting of biotech in healthcare portfolios. The institutional factor may be the most pronounced, as more money from all types of funds is being invested in biotechnology stocks.
The biotechnology investment model of the past few years remains intact, best described as a food chain effect whereby life science R&D creates product pipelines that are licensed or acquired by larger players, especially big pharma. Investment in the space is also driven by the need for specialty pharmaceuticals to replace revenues lost to generic drugs, since it is estimated that $21 billion worth of drugs are coming off patent in 2006 alone.
Biotech drugs also address niche markets with products that are difficult to copy and manufacture. Thus even big pharma is directing more R&D expenditures toward biotechnology products.
YTD performance with exchange-traded funds in the sector as of March 4 are: IBB $85, up 9%; PBE $19, up 8%; BBH was at $195, down 3%, as smaller-cap issues outperformed large-cap stocks, such as Genentech (www.genentech.com) and Amgen (www.amgen.com),which were both down about 7%, YTD. Among the larger biotech funds Fidelity $68.26 is up 8.9% and the more diversified T. Rowe Price Health Sciences $26.9 is up 7.3%.
IBB exceeded its post 2001 bubble high of $84 but has not approached its all-time high of $102. IBB needs to stay above $70 during the usually weak March–April period to confirm a longer-term track that could exceed all-time highs achieved in late 2000.
The larger-cap weighted BBH $194 hit an intermediate bottom in March of 2005 of $136 (almost a triple bottom from August 2004 low of $130), then soared to a high around $210 in November of 2005. The all-time high was $240 in September 2000.
Scientific breakthroughs, strategic partnerships, and positive clinical results have increased the value of biotech product pipelines, boosting demand for small- and mid-cap stocks.
In this article, we profile four companies that have already captured the market interest, are well funded, have strong pipelines, and are poised to advance to the next tier of biotech market capitalization, assuming positive clinical developments.