Dow Jones Newswires -- June 8, 2001
SMARTMONEY.COM: Is Biotech Finally Going Its Own Way?
By REBECCA THOMAS
NEW YORK -- As far as couples go, technology and biotechnology make for an odd one. After all, the fate of chips, PCs and telecom equipment is hardly linked to new developments in cancer drugs or the ins and outs of the Human Genome Project.
Yet historically, investors have insisted on treating these groups like husband and wife. Over much of the past year, for instance, tech and biotech have moved in lockstep despite very different profit outlooks. Broad swaths of the technology sector have been saddled with earnings-eroding excess inventories while biotech companies have been pumping out profit-boosting products at an accelerated pace.
Now it looks like a separation may be in the works. During the first quarter, biotech stocks followed tech stocks south as investors sought shelter in defensive equity sectors and government bonds. The Nasdaq Biotechnology Index fell 29% compared with the Nasdaq Composite's 26% decline. But since both sectors bottomed out in early April, biotech has been rebounding with much more vigor than the broader tech market. To wit, the Nasdaq biotech index has risen 58% since April 4, dwarfing the Nasdaq's 36% gain.
There's certainly been plenty to cheer about. In the past week alone, Amgen (AMGN) announced positive results from a final-phase study of its prostate-cancer drug, Aberelix. Idec Pharmaceuticals (IDPH) blew away analysts' sales estimates for its blockbuster cancer-fighting drug Rituzin. And while Genzyme General (GENZ) split its stock, the Food and Drug Administration cleared Human Genome Sciences (HGSI) to test its experimental growth hormone. On Tuesday, biotech stocks reached a six-month high after a number of analysts issued upgrades and J.P. Morgan recommended clients overweight the group.
Does all this mean biotech can really break out? Or more pointedly, can it keep climbing, irrespective of the Nasdaq's next move? "You can't time it, it's extremely volatile," says Dan Gillespie, Rydex vice president and senior portfolio manager of sector funds. "But in the long run, this is the place to be."
Given this sector's penchant for roller-coaster moves, analysts and fund managers are cautious. But most agree that the outlook for biotech is improving as more and more companies turn out products with real profit potential. "There may be a summertime pause," says Camilo Martinez, co-manager of Dresdner RCM Biotechnology fund (DRBNX). "But 2002 should be a banner year for biotech."
Tim Bepler, manager of Orbitex Health & Biotechnology fund (ORHAX), thinks that as the biotech industry matures, it will begin to outperform the broader tech sector. "The fundamentals are simply better," he explains. "These companies are flush with cash, their balance sheets are sterling, and there's lots of room for acquisitions."
Not surprisingly, biotech funds have flourished in this environment. Though specialty health-care funds (which include biotech) are still down 8% on the year, their performance in May was bested by only small-cap value and financial funds, according to Morningstar. Among the best performing over the past month are the Biotechnology UltraSector fund (BIPIX) and Hancock Biotechnology fund (JBTAX), up 21.5% and 18.5%, respectively. Another trendsetter: GenomicsFund.com (GENEX). Since April 4, the supervolatile fund is up 84%. "We were ranked the No. 1 fund in the June quarter last year by Lipper, and the way it's going now, we may be No. 1 again," says fund manager Steven Newby.
Part of the decoupling between tech and biotech has to do with the insights investors have gained during the economic slowdown. Near the end of the bull market, analysts began crowing that technology was impervious to economic cycles because computers and networks enhanced corporate profits so dramatically. The recent economic downturn, alas, blew a hole in that myth. Biotech, on the other hand, has proven itself to be a dependable grower.
"The first quarter was the first time you could see the stark contrast between tech and biotech," says John Sonnier, a biotech analyst at Prudential. Though hardly viewed as a safe haven by investors, a biotech company (once it gets off the ground) can actually be nearly as stable as a regular pharmaceutical business. Demand for a proven product is virtually guaranteed. Indeed, Bepler says he would be surprised to see any negative preannouncements from the group in the current quarter - something that could hardly be said of technology.
Cash inflows into health-care/biotech sector funds are a promising sign, too. In contrast to the beginning of the year - when 11 of the first 13 weeks saw outflows - money has been returning to life-science mutual funds. According to AMG Data Services, inflows have been positive for seven of the past eight weeks, and that's typically a good indicator of price performance. Meantime, flows into pure technology funds were only positive in four of those same weeks.
We'd hardly recommend you blow off technology (much less your more conservative investments) for biotech. There's still plenty of risk involved in this growing sector. But a smattering of quality biotech names could well enrich an already well-diversified portfolio.
In general, analysts recommend well-known companies with commercial products or drugs in late-stage clinical trials, such as Amgen, Idec and MedImmune (MEDI). Liu-er Chen, portfolio manager of Evergreen Health Care fund (EHCBX), likes Genentech (DNA), despite its 35% run-up since early April. But he is more wary of riskier companies that are making slower progress on drug development and aren't yet cash-flow positive. Those, Chen says, should continue to move in lockstep with technology.
Nevertheless, because large-cap biotech companies have provided much of the leadership this quarter, some analysts are scoping out midcap and small-cap names, which account for roughly 85% of the publicly traded biotech sector. Unlike their large-cap brethren, which have real earnings and revenues, many of these smaller companies are still in the developmental stage. But that doesn't mean small fry with liquid stocks and drugs in late-stage clinical trials don't exist, says Prudential's Sonnier. Among his favorites are Amylin Pharmaceuticals (AMLN), InterMune (ITMN) and Myriad Genetics (MYGN). Similarly, Bepler of the Orbitex fund is buying smallish names that he calls "next-generation Amgens." His favorites have drugs in final-phase trials and promise profitability within the next year to 18 months. Examples include Xoma (XOMA), Sepracor (SEPR), Imclone Systems (IMCL) and Icos (ICOS).
Though there are certainly steals outside the drug-producing biotech subsector, companies that sell information (DNA and protein databases) or equipment (used in gene discovery, sequencing and analysis) are less understood by investors and can, therefore, be more volatile. Says Newby: "Everybody can comprehend the idea of a pill that makes cancer go away."
Now if only everybody could comprehend the fundamental differences between technology and biotechnology.
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