StreetTalk: BioPharm Stocks: What the Pros Look For

The trend in recent years has been to stash money into a bevy of life sciences companies by investing in a biotech or pharmaceutical stock mutual fund
Apr 01, 2006
Volume 19, Issue 4

Brian O'Connell
Coming from Wall Street. I'm often asked what "professional" investors think about the life sciences industry.

I talk to traders, analysts, and financial advisors all the time and the consensus seems to be, "We're not sure."

Big-time investors have a sense of uneasiness, almost frustration, with the biopharm market. Sure, there is money to be made in the industry, but the risk of failed ventures, slow research pipelines, lawsuits, and uncertainty about the federal government's new prescription drug program hold many investors back.

I've said it before and I'll say it again. Wall Street hates uncertainty. It drives investors away. From my point of view, there remains a great deal of uncertainty about biopharm stocks all over the financial markets today.

Look, I understand that staking a big bet on the biopharm markets has never been for the weak-kneed. Clinical trials are no sure thing — they are the life sciences equivalent of betting on the Chicago Cubs to win the World Series. But such trials can spell the difference between a biopharm firm writing its quarterly earnings statements in black ink or red. Relative to other industries, like telecom or manufacturing, biopharm firms also have high cash-burn rates.

Fair or unfair, these are the issues that professional investors examine when deciding whether to dip their toes into the biopharm market. The trend in recent years has been to stash money into a bevy of life sciences companies by investing in a biotech or pharmaceutical stock mutual fund.

Favorites of Wall Street professionals are funds like the $2 billion Fidelity Select Biotechnology (NASDAQ: FBIOX, which holds about 60 biopharm industry stocks). It relies on large-cap life sciences companies (more on that in a moment); a lousy clinical trial for one firm in the fund is easily balanced by good news from another. Exchange Traded Funds (ETFs) are catching fire, too. Barron's reports that, through the end of February, 2006, ETF assets have surpassed $300 billion. That's three times more than the total amount of ETF assets at the end of 2002.

Proponents call ETFs America's "next generation" of financial products. They offer daily liquidity, low expense ratios, and tax efficiency.

Right now, there are two primary ETFs that focus on the biotechnology industry: iShares NASDAQ Biotechnology (AMEX: IBB) and Biotech HOLDRS (AMEX: BBH). Both are getting a lot of business from investors, who prefer the bundled approach rather than one that requires them to pick individual stocks.


To be fair, the numbers for biopharm companies in the financial markets aren't bad. According to the Burrill Biotech Select Index, the biotech sector, at a gain of 5.6% for the year, outperformed both the benchmark Dow Jones Industrial Average and the NASDAQ Index (at 2.25% and 2.5%, respectively).

G. Steven Burrill, CEO of San Francisco-based Burrill & Company, says it's the bigger companies that continue to attract the most investment dollars these days. "Biotech's success in the capital markets has been led by the large cap companies with robust product pipelines and diversity," he asserts.

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