OT: The Nasdaq embraces biotech
December 17, 2001: 6:45 p.m. ET
Don't look now but the Nasdaq 100 is starting to look like a biotech fund.
By Paul R. La Monica
NEW YORK (CNN/Money) - Welcome to the big leagues, biotech.
If Amgen's $16 billion purchase of rival Immunex wasn't enough to make investors notice the sector, consider this: On Monday, the Nasdaq Stock Market announced its annual changes to the Nasdaq 100 index, the largest non-financial stocks of the more than 5,500 companies that list on the Nasdaq exchange. And of the thirteen companies being added, seven are from the biotechnology sector.
Into the index come companies like Icos, which is working on a male-impotence drug, and Invitrogen, a manufacturer of research tools for biotechnology companies. Out go technology companies whose fortunes were closely tied to the Internet, like Ariba, Broadvision and CNET. The changes will be effective Dec. 24.
Wall Street is crazy about biotechs
Clearly this is another sign of the increased interest in biotech sector. Investors now have a plethora of biotech mutual funds to choose from, including funds from big asset management companies like Fidelity, John Hancock and Alliance.
The consolidation trend in biotech was already heating up before Amgen (AMGN: up $3.46 to $59.49, Research, Estimates) and Immunex (IMNX: up $3.44 to $29.06, Research, Estimates) agreed to the largest biotech merger ever.
But the Amgen/Immunex deal makes it even more likely that large pharmaceutical firms will try and buy biotechs, says Zack Shafran, portfolio manager for the Waddell and Reed Advisors Science and Technology Fund. The big drug firms are struggling to come up with new blockbuster drugs and the smaller research-oriented biotechs are increasingly developing top new treatments.
In addition, the Nasdaq's rebalancing may be just the beginning of the addition of more biotech stocks to prominent indices.
Frank Sustersic, portfolio manager for the Turner Healthcare and Biotechnology Fund says the inclusion of biotech companies in the Nasdaq 100 is a "significant positive" and adds that he expects more biotechs to be added to an even more widely watched benchmark, the S&P 500. Genzyme (GENZ: up $0.32 to $58.89, Research, Estimates) was added to the S&P 500 on December 13, making it the sixth biotech company in the index (Amgen, Biogen, Chiron, Immunex and Medimmune are the others).
QQQ is still risky -- maybe even riskier
The Nasdaq 100 is widely viewed as a proxy for the technology sector. To that end, a security known as the Nasdaq 100 Index Tracking Stock (QQQ: up $0.69 to $40.80, Research, Estimates), which trades on the American Stock Exchange, allows investors to invest in all 100 companies in the index. This exchange traded fund (ETF), more commonly referred to as the Triple Qs or Cubes because of its ticker symbol, trades just like a stock and is typically one of the most actively traded issues on Wall Street. Volume for the QQQ exceeded 60 million shares on Monday.
But once the changes to the index are made, investors could be forgiven for mistaking the Nasdaq 100 for a biotech fund. The index, which already had a healthy (pardon the pun) biotech representation, will now have 20 biotech companies in it.
Mike Byrum, chief investment officer for mutual fund firm Rydex, argues that the Nasdaq 100 may be slightly less volatile now that many Internet-related companies are out of the index. The Nasdaq 100 has plunged 34.1 percent year to date as of Dec. 14. And that comes on the heels of a 36.8 percent drop in 2000.
Still, will getting rid of companies like Palm and Inktomi in favor of ImClone Systems and Sepracor, make the Cubes any safer a bet? If anything, the increased exposure to biotech could make the index even riskier.
Two of the seven biotechs -- Icos (ICOS: up $0.76 to $62.42, Research, Estimates) and Sepracor (SEPR: down $0.07 to $55.40, Research, Estimates) -- are expected to lose money in 2002.
Meanwhile, ImClone (IMCL: down $1.39 to $68.61, Research, Estimates) and Protein Design Labs (PDLI: up $0.98 to $33.15, Research, Estimates) have triple-digit earnings multiples, trading at 196 and 474 times 2002 earnings estimates, respectively. Invitrogen (IVGN: up $0.84 to $63.99, Research, Estimates), at 30.9 times 2002 earnings estimates, is the cheapest of the seven while Cytyc (CYTC: up $0.62 to $25.70, Research, Estimates) and Cephahlon (CEPH: up $0.33 to $69.69, Research, Estimates) are trading at 39.5 and 67.7 times 2002 earnings estimates.
Biotechs by their very nature are extremely risky stocks and even the largest and most profitable are not immune from this volatility. Shares of Immunex, for example, fell nearly 40 percent in one day back in March after the company reported that its top-selling rheumatoid arthritis drug Enbrel did not also work in clinical trials for congestive heart failure. Just last week, the stock of Pharmacyclics plummeted 56 percent after the company announced negative late-stage trial results for its cancer drug Xcytrin.
The Nasdaq 100 may now be more relevant due to its latest annual reshuffling but the QQQ is still not for the faint of heart |
