Investors in the nation's biotechnology sector are riding a roller coaster this summer, seeing indexes that track these companies reach...
WASHINGTON — Investors in the nation’s biotechnology sector are riding a roller coaster this summer, seeing indexes that track these companies reach their highest levels in years — then retreat amid doubts about whether the rally can be sustained.
The bumpy ride is a reminder that biotech investing is not for the timid. The industry is a source of continual fascination for investors who think modern science can deliver cures, and make a lot of money in the process. But it also can be hazardous to people’s financial health, so much so that many analysts warn small investors to approach the sector with caution, if at all.
Biotechnology companies consume investors’ cash voraciously to develop new products. The industry has never been profitable overall — U.S. companies lost $6.4 billion in 2004, according to a report by Ernst & Young, a consultancy.
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But the investment is slowly paying off: The industry has delivered a slew of new products in recent years, and its revenue is growing rapidly, hitting $46 billion in the United States in 2004, up 17 percent in one year. The industry could reach profitability as early as 2008, Ernst & Young predicted.
The world’s biggest and most visible biotech companies, Amgen and Genentech, both of California, are profitable. And they have turned in sterling performances this year, particularly on sales of drugs used in cancer treatment. Amgen bought Seattle’s Immunex in 2002.
“The earnings tell you this isn’t just an industry that’s built on promise anymore,” said John McCamant, editor of the Medical Technology Stock Letter in Berkeley, Calif. “The companies are showing: We can deliver the numbers.”
The Amgen and Genentech performances exceeded Wall Street’s expectations and helped fuel a midsummer rally in the shares of smaller companies, analysts said.
“You have had some very good performance by the two marquee names in the sector,” said Alexander Hittle, a stock analyst at A.G. Edwards & Sons of St. Louis. His company earns fees from biotech companies for investment-banking work.
“When investors see the success of the bellwethers, they imagine that all their smaller hopes-and-dreams stocks will one day rise to similar greatness.”
Also fueling investor interest have been recent buyouts of a handful of smaller biotech companies. Such acquisitions can put a premium in the pockets of investors regardless of whether a company has reached profitability, so they tend to spark hope of more buyouts.
Buoyed by those factors, the Amex Biotechnology Index, which tracks the performance of 17 larger biotech companies, jumped nearly 20 percent from early June to early this month, hitting a four-year high Aug. 3. The Nasdaq Biotechnology Index, which tracks the shares of 157 companies — mostly smaller, more speculative ones — rose 21 percent in the same period to hit a 15-month high Aug. 3.
Share prices of biotech companies often diverge from the broader market, particularly on important news, good or bad, about drug approvals by the Food and Drug Administration.
But sometimes, in the absence of news directly affecting the sector, the shares track the broad market, as both biotech indexes have been doing since hitting their highs early this month.
Overall, the Amex index is still up 11 percent for 2005, reflecting Wall Street’s enthusiasm for bigger biotech companies with profit to report, but the Nasdaq index has given up all its midsummer gains and is down 2 percent for the year.
Much of the action these days is in cancer. Big pharmaceutical companies sell useful but highly toxic chemotherapy drugs that are the mainstay of cancer treatment. Biotech companies are gradually augmenting that approach with less toxic injections that use genetic strategies to target tumors.
Success with cancer treatment has fueled the earnings of Genentech in particular. Rituxan, a drug that it co-developed with Biogen Idec of Cambridge, Mass., has become one of the world’s biggest cancer treatments, and a Genentech drug called Avastin that reduces blood flow to tumors is gaining rapidly.