Street Talk: Cautious Optimism: the Watchwords for Volatile Sector

Biotech doesn't play by the same rules that most industries do when it comes to stock performance
Jun 30, 2007


Brian O'Connell
As I've been saying, 2007 is turning out to be a strange year for investors. Going back to February 26, after the Big Dip when the stock market tanked some 500 points, before rebounding, the Standard & Poor's Index had been down about one percent through mid-March. But it has bounced back in a big way, rising from around 1,375 to 1,515 through the end of May. The Dow Jones Industrial Index is climbing, too; it reached a high of 13,500 on May 24. The Biotech stock indexes followed suit, falling slightly more to 1.12%, according to the Morgan Stanley Biotech Index, before bouncing back in April.

Which leads me to my topic for today—my favorite biotech electronic trading fund (ETF)—BBH Holdrs.* This fund has meandered so far in 2007, down 10 points or so since the late February stock market debacle, but up 1.9% (through late May, 2007) and is up over 7% over the last year. The fund shot up in April, rising 6.3% as its "big guns" rose accordingly, thanks to a stiff tailwind from the rest of the broadening stock market and some welcome sales revenue and clinical trial news.

For instance, Amgen saw its stock climb 5% after reports that its Aranesp anemia drug did not contribute to the deaths of patients in a Phase 3 lung cancer trial. BBH also benefited from Gilead Sciences, which saw its first quarter earnings spike upward by 55% from the year before, adding $4 to its stock price.

Immediately after investors got hold of both these bits of good news, shares of BBH climbed almost 4% in one week alone, to $186 (a 2% rise in the value of the overall portfolio).

Some Wall Street gurus jokingly refer to BBH as the Amgen–Genentech fund, and perhaps with good reason. Genentech, Amgen, and Gilead Sciences make up most of the fund, along with Genzyme, Medimmune, and others. That's like having Manny Ramirez and Chipper Jones anchoring your company's beer league softball team.

BBH was hardly alone in suffering a setback in February and March; the AMEX biotech index and iShares Nasdaq Biotech Index fell in lockstep with BBH and the rest of the equities market. Patent protection was one sour issue impacting life sciences companies—more than 70 drugs will lose their patent protection in the next few years, including Pfizer's cholesterol reducer Lipitor and Bristol-Myers Squibb's blood thinner Plavix. Business Week estimates that pharmaceutical companies could lose up to $100 million in lost sales by 2011.

But there is good news in other areas, like quarterly earnings. Clinical drug trials, and an overall stock market that continues to grow, despite taking its fair share of lumps in the housing and oil and energy sectors, have trumped the potentially bad news, or at least pushed such news to the shadows for the time being.