Some good Joe Duarte comments on the "importance" of biotech, headline is "Telecom Has Troubles. But Biotech’s Potential Implosion Could Harm Lives":
While everyone is concerned about the continuing implosion of the telecom sector, we note that the Amex Biotechnology Index closed last week at levels not seen since the index tested the 380 area in December 1999 and March 2000. If the biotech sector manages to close significantly below 380, the chances for a multi year break down and extended bear market will rise astronomically. It’s not that as if the sector hasn’t suffered enough in the last two years, having been cut in half already from its late year 2000 highs. But, what is of concern technically is that a break below 400 could take the index down to 300 in a hurry and knock off another 25% of market value from this compendium of biotech blue chips. If this happens, as it well could, there could be severe repercussions outside of the stock market and business world, for biotech has become a significant source of what many now consider routine pharmaceuticals.
Aside from the loss of market valuation and the wiping out of shareholder equity, if these blue chips continue to implode, in the current market, it will be just a few days to a few weeks before Moody’s, S&P, and other debt rating agencies begin to do the Worldcom Debt Degradation dance on the likes of Amgen, Genzyme, and Protein Design Labs. If these blue chips and even more important, the rest of the sector which features pure research stage companies, can’t borrow money, or raise equity through secondary offerings, research expenses will become secondary to survival expenses. And this means that job cuts, project cuts, plant closings, bankruptcies, and even worse, delays in production of drugs needed by patients to survive will be a daily occurrence. Worst of all could be the problems with not only drugs to treat rare diseases, but actually important drugs in the war against terrorism such as vaccines, and other biotech derived entities. It will mean slow downs in clinical trials to treat AIDS, shortages of chemotherapy to treat cancer, and even more shortages in things we have come to take for granted, such as annual flu shots.
And for those who think this line of thinking is alarmist, remember that nobody, ourselves included, expected Worldcom to be trading below $2 despite billions of dollars in prime assets such as UUNet. And nobody would have thought that AT &T, one of the crown jewels of Americana and the stock market could be driven into the ground and turned into a shadow and a shell of its former self. And while there were many skeptics on the Internet bubble and its eventual collapse, humans can live without real time quotes, streaming video, and the latest news on their computer screen. But if you are a diabetic, or suffer from a rare enzyme deficiency such as those that suffer from Gaucher’s disease, you can’t live without the insulin manufactured by Genentech and others, and you can’t live without the enzyme analogs manufactured by Genzyme and Transkaryotic therapies. Sure, it’s a doomsday scenario, but one which is worth exploring and proclaiming.
Blame Imclone for seeming to perpetrate and Enron like hoax with its controversial drug Erbitux. Blame the FDA for getting too tough on the requirements for drug applications. Blame the hedge funds for being trigger happy. Or blame no one at all and throw your hands up just the same. But, the fact is that there is now a loss of confidence in the biotech sector, which is either a sign that the bottom has to be near, or that investors are about to walk away en masse and that the sector is about to collapse. If you believe in the power of options to predict the future, you may be cheered by the fact that put option buying skyrocketed last week on the BTK options. You may also be cheered by the fact that the index has held support near this area four times since the year 2000, suggesting that this is likely to be another entry point for savvy traders. And of course if all else fails, you could hope that we are wrong as all hell and that this sector will pull itself together and mount a monumental rally. Time will tell. And to be honest, we aren’t sure which way this thing will break. But, to say that we are concerned, well, that would be an understatement. |
