Big Biotech Booms But IBB Falls Flat

Shares in the biotech firm Amgen (AMGN) shot up Monday morning after the firm announced major developments for two of its products: Nplate, a drug designed to treat a rare form of blood-platelet deficiency, received final approval from the FDA, and the results of a three-year Phase III study on osteoporosis drug denosumab indicated that the drug was effective and safe. iShares Nasdaq Biotechnology ETF (IBB), which recently had more than 10% of its assets invested in Amgen, jumped on the news. The rally ended abruptly, however, when it was revealed that the report on Nplate was inaccurate, and that it would be another week until the FDA announced its decision. Investors quickly shed Amgen shares, dragging down IBB.

It’s not wise to read too much into the ups and downs of one stock on a single day, but IBB’s reaction to Monday’s events nicely illustrates the factors that drive the fund’s returns. Two factors are critical to biotech firms: the number of popular drugs to which they hold rights and the quality of their pipelines. Investors tend to bid up shares of companies with promising drugs on the cusp of regulatory approval. A large percentage of IBB’s assets are invested in a few major biotech firms, so the fate of those firms’ products are tied closely to IBB’s performance. For example, when the FDA does make a decision on Nplate, IBB is sure to react.

IBB invests in around 150 biotech stocks with market caps larger than $200 million. The biotech sector is filled with small research-oriented firms that are ripe for growth but weighted with risk. IBB usually places about a third of its assets in those mid- and small-cap firms, and gives the giants of the sector, such as Amgen, the remainder. But even the larger firms in the biotech sector are relatively small compared to their cousins in the pharmaceutical sector. IBB’s average market cap was $5.2 billion recently, indicating that it has more exposure to the small end of the spectrum than do many biotech funds.

The first half of 2008 was much friendlier to large-cap biotech stocks than to their smaller peers. Bleak economic conditions and plummeting stock indices caused investors to gravitate toward defensive stocks. The health care sector contains loads of such stocks, including biotech firms with strong products and pipelines. IBB fell sharply in the first quarter, but by July 14 the fund nearly broke even for the year, with a loss of less than 1%. The recovery largely stemmed from strong performances among the fund’s top holdings, particularly Amgen, Gilead Sciences (GILD) and Celgene (CELG).

Amgen gained about 10% year to date through July 11, even as safety concerns weighed on sales of a few of its key products. Many analysts are optimistic about the stock due to the company’s strong R&D capabilities, a recent restructuring, and the fact that Nplate and denosumab are nearing the end of the regulatory process. The results of the denosumab clinical trial released this week may ultimately be more important for Amgen than the approval of Nplate will be. There’s a fairly large market for osteoporosis treatments, and the drug could eventually be used to treat cancer as well. But it may take a while for analysts to sort through the results of the study to determine whether the drug has the potential to compete with other osteoporosis drugs. Adam Feuerstein, a biotech commentator at TheStreet.com, argues that in order for investors to consider denosumab a success, “Amgen has to produce knockout data—great efficacy with no safety problems.”

The strongest contributor to IBB’s performance this year has been Celgene, which through July 11 gained an impressive 55% for 2008. The firm’s strong position is largely attributable to the success of one drug: Revlimid, used to treat blood cancer. Of the firm’s $1.4 billion in 2007 sales, $774 million came from Revlimid. Sales of the drug are likely to keep growing, but investors may be even more impressed by the lineup of drugs in the firm’s pipeline. Drugs designed to treat conditions ranging from psoriasis to immune-inflammatory diseases are in the works, and the firm’s recent acquisition of competitor Pharmion adds even more breadth to that list. That said, Celgene does face stiff competition for many of its products, including generic versions of its longtime profit-maker, Thalomid.

IBB stands at position 15 on the ETF Momentum Tracker Table this week, up from 26 three weeks earlier. Whether IBB can continue building momentum will largely depend on how well products like denosumab and Nplate fare as they negotiate the FDA’s approval process. That said, other factors are likely to influence the fund’s performance as well: whether the health care sector’s defensive qualities continue to appeal to investors; how deeply the credit crisis impairs biotech firms’ access to cash; and—in the longer term—the possible changes to the nation’s health care system that could come with a new presidential administration.

Comments

[User 105592]

IBB is up over .80 today, you call that flat???