As we approach the end of 2005, I was struck by the divergence in performance between large cap biotechnology stocks and small cap biotechnology stocks. Large cap biotechnology stocks represented by the AMEX Biotechnology Index (ticker: BTK) are up over 24% year-to-date whereas small cap biotechnology stocks represented by the Nasdaq Biotechnology Index (ticker: NBI) are up a paltry 1.4%. (The AMEX Biotechnology Index is composed of 17 large cap companies while the Nasdaq Biotechnology, which consists of 161 stocks, although includes large cap biotech stocks, is weighted with small cap stocks.)
An explanation for this divergence is that there has been a rotation out of large cap pharma into large cap biotechnology. The divergence of the AMEX Biotechnology Index and the AMEX Pharmaceutical Index support this hypothesis.
Given the challenges in the pharmaceutical sector – slowing growth, patent expirations, product recalls and barren pipelines – it stands to reason that investors wanting exposure to pharmaceuticals would look to large cap biotechnology, which exhibit characteristics contrary to those of large cap pharmaceutical companies. I believe this represents a long-term trend and signifies the maturation of the biotechnology sector.