StreetTalk: 2004 Round-Up

Generic drugs, wellness programs, and an exciting election contributed to volatility in an otherwise positive year for investors
Dec 01, 2004
Volume 17, Issue 12

Brian O'Connell
The holidays are upon us. It's the time of year that begins with gala parties in December and ends when you finally realize what you spent, usually around April 15 of the next year. Too Scrooge-like? Hope not. I just partook of some bad eggnog.

Just the same, December is a great time to take stock; to assess the year we're leaving behind and try to glean some meaning from the events of the past 12 months. In our biopharmaceutical world, 2004 truly was, as this month's headline suggests, the best of times and the worst of times. It began with high hopes in an industry that was clearly rebounding from the doldrums of 2000-2003. It ended with a historic U.S. presidential election that should shape the industry in favorable ways for years.

LOOKING BACKWARDS In this momentous year, events of great consequence took place. Among those, here is a short list of my favorites:

Figure 1. Nasdaq Biotech Index (November 2003 —November 2004)
The BioPharm Stock Rebound. While the overall stock market struggled in '04, held back by uncertainty over the War in Iraq, the presidential elections, and the plummeting dollar, the Nasdaq Biotech Index (NBI) finished up (through November) up about six percent for the year. Make no mistake, the index was volatile, sinking to 622.01 in late August after skyrocketing to 851.44 in early May (Figure 1). Pharmaceutical stocks held up roughly equally well, giving biopharm investors a leg up on the markets this year. An index fund (PPH) allows tracking.

Why the gain? Biopharm financing was up by about 250% compared to 2003. Venture capitalists rediscovered the sector turning the life sciences into the "go to" place for big money in 2004 relative to other industries. In the first quarter, venture capitalists fed $1.3 billion into the biopharm sector, according to the North American Venture Capital Association.

Merger activity in the industry was strong, as well. Maybe not at the 80% rate of announced mergers we saw in 2003, but still growing at a respectable 35% in '04.

Best Bets: Stocks and Funds. Making the most noise in the life sciences industry were a handful of key stocks. Some had good years and others did not. Steady performers included biotech mainstays like Amgen (AMGN), Genentech (DNA) and more speculative plays like Atrix (ATRX), which is up about 33% for the year. Valuations are cheapest in the pharmaceutical sector where heavy hitters like Novartis (NVS) have outperformed (up 25%).

What were the best mutual funds in the sector? I told you about the Vanguard Health Care Fund (VGHCX) earlier in the year and was happy to see the fund really pan out for investors in 2004. NAV (net asset value) was up from 110 in January to 127 at year-end. Another decent performer was the Eaton Vance Worldwide Health Sciences (ETHSX). The fund didn't gallop along with the speed of the Vanguard Fund. But it did provide some much-needed stability for investors suffering from losses in other sectors.

Worst Bets: Stocks and Funds. Stocks I thought would do well — but didn't — include Ligand (LGND) and NPS Pharmaceuticals (NPSP), which has fallen about 40% since the beginning of January. Highly anticipated plays like Eli Lilly (LLY) and Pfizer (PFE) disappointed, with both down over 20% for the year.

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