September 8, 2007

Did we see Biotech turn the corner last week?

Biotech stocks provided some leadership in the markets last week, as the volatility of the overall market didn't affect the sector. The iShares Biotech ETF (IBB) returned 2.40% for the week, while the Dow Jones Industrial Average fell by 1.83% and the S&P 500 lost 1.39% for the Labor Day-shortened week. Biotech's leadership was courtesy of some bullish comments from several analysts and a positive outlook from Biogen.
The week started with an upgrade of the entire sector to "overweight" from "market perform" from Bernstein Research. Biogen (BIIB) then added to the fire Thursday by releasing a promising outlook for the next three years. Biotech also got a vote of confidence Thursday from Jim Cramer, as he said that Celgene (CELG), Gilead (GILD), and Cephalon (CEPH) are "worth a look." He also said that, "As the economy slows, you want to own biotech." Lastly, the week concluded with two bullish notes on Gilead, one from Lazard Capital and the other from Zacks.

Cramer called the last three years a bear market in biotech and after a summer of bearish note after bearish note, I'm wondering if biotech could be on the verge of a breakout. There are several factors that I see that could help biotech going into the fourth quarter.

First, is the idea of recession. During a weak economy the conventional wisdom is to turn to companies that don't have business that ebbs and flows with the economic cycle.
Second, is that most biotechs should have limited exposure to the financial crisis that has the markets continuing to worry. Biotechs are mostly financed with equity and the buyouts tend to be cash-based.
Lastly, the continuing weakness in the dollar and strength of international economies will help biotech because these companies sell their products all over the world and/or receive royalties from overseas sales.

I liked what we saw last week. Despite the overall weakness in the market and the obsession with whether or not the Fed will cut rates, I think biotech will remain clear of the turmoil. Also, the fourth quarter tends to be a good time to own biotechs because a lot of information is released during this time of the year. Clinical trial data and strong outlooks, like Biogen's, could really fuel a strong run for biotech toward 2008.

Disclosure: I own shares in GILD