Time To Take Another Look At The Biotechnology Sector

by: BubbleBustInvesting

When talking about technology these days, investors think about bellwether stocks like Apple (AAPL), Goggle (GOOG), and Microsoft (MSFT) that are on everyone's radar. After the recent run up in these stocks, however, aggressive investors may want to look at another segment of the technology industry, biotechnology, which is on the verge of a comeback, for several reasons:

First, a wave of new FDA approvals, and a strong research pipeline, especially among small biotechs developing cancer treatments. Last week, Affymax, Inc., (AFFY), for instance, received FDA approval for its anemia drug OMONTYS, putting an end to Amgen's (AMGN) Epogen and Aranesp drugs. Two weeks earlier, Discovery Labs (DSCO) received FDA approval for Surfaxin for prevention of respiratory distress syndrome. Smaller companies like Acadia Pharmaceuticals (ACAD) have a good pipeline of drugs for rare but devastating diseases like Parkinson's and glaucoma. Specifically, pimavanserin is in Phase III clinical development as a treatment for Parkinson's disease psychosis, AGN-XX/YY is in Phase II for chronic pain; and AC-262271 is in Phase I for glaucoma in collaboration with Allergan (AGN).

Second, a wave of M&A at considerable premiums. Last week, Spectrum Pharmaceuticals Inc (SPPI) announced the purchase of Allos Therapeutics (ALTH) for about $206 million, while a couple of weeks ago, Bristol-Myers Squibb (BMY) made a takeover bid for Amylin Pharmaceuticals (AMLN), following another takeover bid by Roche to buy Illumina (ILMN).

Third, a low interest rate environment conducive to risk-taking. Fourth, a weak economic environment that favors non-cyclical industries, as evidenced by the recent disappointing payroll report. Fifth, the aging of the baby-boomers that creates a vast market for existing drugs and the urgency for developing new treatments.

A word of caution: Biotechnology companies are open to all sorts of threats, including competition from new drugs, rising interest rates, and inability to market approved drugs effectively, as has been the case with Dendreon (DNDN). One of the company's products that has received FDA approval is Provenge, for the treatment of metastatic prostate cancer. The problem, however, is that the drug is too expensive and its benefits too limited to accept broadly. That's why the company's performance, especially its revenue, has failed to stand up to analysts' expectations. The stock has been on a rough ride, trading in the low $40s two years ago when it received FDA approval, then down to the low teens recently.

Disclosure: I am long ACAD, AFFY.

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