Anton Johnson

5 Potential Buyout Targets in Biotech - Barron's

Years ago, I thought that I could divine the future of the biotech companies. Account damaging stock gaps from failed “sure thing” phase–three studies and unexpected drug side-effects required a reassessment of how to successfully invest in the sector. Fortunately, before long I realized that foretelling a novel compound’s efficacy and long term safety was beyond my prophetic ability.

Most industry group sub-sectors have a high price change correlation among component companies; however this is not the case with biotechnology. This characteristic suggests that a shotgun approach will be a logical path to success.

The biotech industry in aggregate creates many successful marketable compounds, with ensuing product profits much greater than the sum of cash burn, and long safety issues with resultant litigation expenses, etc. Thus, a more effective way to gain exposure is by using an eight stock or greater basket, or an ETF; select an ETF carefully though, as company weighting methodologies can vary greatly among ETF managers. For example, currently BBH has a huge 39.5% allocation to DNA, whereas XBI has a maximum of 6.1% in any one company. Also, as you would expect, with diversification we can expect a less-wild ride; using daily closing price, the sixty-day standard deviation of XBI is 25.7%, whereas the same for BIIB is 83%, and for ELN a gut-wrenching 209.2%.