The Bi-Polar Biotech Market Will Continue

 |  Includes: BTK, MNK, NBI, PPH
by: Michael Shulman

I typically write about smallish, unknown or misunderstood products and companies and this category of biotech and life sciences investment appears to have been whacked harder than most in the current bear market.

That being said, I did a half-year performance analysis for subscribers to my ChangeWave Biotech Investor service and learned the following -- and I'm not touting here ... just illustrating what investors are doing based on the performance of the 34 companies I have "open" since the market peak in October of last year.

  • With the market in bear territory -- down 20% from previous highs on Oct. 9 -- the two major biotech indices have outperformed the general indices. The Amex Biotechnology Index (BTK) is down 11.2% and the Nasdaq Biotechnology Index (NBI) is down 9.7%. Their blended performance is 10% so they are outperforming the market by about 10 points.
  • The average recommendation in my biotech service -- which includes a different mix of stocks than these measures, and also included some device and diagnostic companies -- is down 4.19% since the beginning of the slide to the bear market.
  • The average "mature" company I've recommended -- companies with profits and positive cashflow -- was up 35%. This is sort of an anomaly is due to the 425% rise in one microcap which wasn't added to our stock list until March 2008. It now prints cash and I've written about it here -- Questcor (QCOR). Without QCOR, this group was still UP, on average, more than 6%. All these companies also enjoy at least double-digit growth in revenues.
  • The big-cap (NYSEARCA:PPH), the index representing big pharma, was down 15.5% during this period, meaning it is not just size and profits, it is growth.
  • The average "emerging company" was hurt the worst. They are companies in late-stage trials or are generating revenues (at times considerable revenues) but are still losing money and have negative cashflow. These outfits were down, on average, a whopping 53%.
  • Speculative companies with revenues -- but two more years out and with lots of regulatory hurdles -- were down 43%.
  • What I call "bleeding edge" outfits -- many years away from revenues with unproven science, not to mention regulatory hurdles -- were down 11%.
  • It's a bi-polar market. The big guys, such as Gilead (NASDAQ:GILD) or Biogen Idec (NASDAQ:BIIB), are moving up, the guys in the middle are getting creamed, and the "hope and dream" companies held their own, given the steepness of the falloff in this market. The PPH -- was down 15.5% during this falloff.

I see this trend continuing. High-growth, cashflow-positive, profitable companies will survive and in many cases outperform this bear.