The biotech bright spot
No one will remember this as Wall Street's summer of love.
Broad market indexes were hammered in June and drifted slightly lower still in July, a trading month that mercifully concluded yesterday. Over those two months, the Standard & Poor's 500 index lost 9.5 percent of its value.
Of course, a closer look reveals individual winners and losers in smaller pockets of the market. One of this summer's surprise winners: biotechnology stocks.
The major index tracking biotech stocks moved in close proximity to the performance of the big S&P 500 index for the first five months of 2008. But the Amex Biotechnology Index held its ground in June, when most stocks sunk, and zoomed higher in July to leave the broader market in the dust. The biotech index is up 9.9 percent so far this year, compared with a decline of 13.7 percent for the S&P 500.
One reason: the widely held belief that big drug companies are marketing juggernauts short on products to sell. Investors like billionaire Carl Icahn think drug companies need to buy biotech businesses and their products to feed the marketing pipeline.
That idea has been around for a long time now. There have certainly been deals fitting that description, but it would have been a stretch to call it a genuine trend. Perhaps it's getting some real-world traction now.
Roche Holding AG dropped a bomb last week when it offered $43.7 billion to acquire total control of biotech pioneer Genentech Inc. Roche, which owns 55 percent of the company, offered $89 per share for the rest. The stock has since climbed well past the offer and closed yesterday at $95.25, giving Genentech a total stock market value of just over $100 billion.
Bristol-Myers Squibb Co. is making a similar move, trying to acquire ImClone Systems Inc. for $4.3 billion. The price tag isn't in the same neighborhood, but a purchase of ImClone and its colon-cancer drug Erbitux would surely be another high-profile transaction.
Bristol-Myers already owns a chunk of ImClone and does business with the company. It offered $60 per share yesterday for the 83 percent of ImClone it does not control. The stock enjoyed its best session in 13 years yesterday, closing above the offer price at $63.93.
Icahn is chairman of ImClone and the company's second-largest shareholder. He pushed for a sale of ImClone in the past, but was unable to find a buyer at an acceptable price.
All of this activity tends to push other biotech stocks higher. But factors beyond a lot of merger talk are sending those stocks higher.
Investors began to move money out of other parts of the market and into biotech stocks a couple of months ago in search of a safer harbor. "There's a big rotation moving into the sector that started with large caps [in June] and now it's moving into smaller and mid-size stocks," says one fund manager who owns biotech shares.
Some growth-stock investors consider biotech shares better defensive bets in a bad economy. Customers may buy fewer computers or other high-tech products during a recession, but the business performance at most biotech companies has little to do with the overall economy. If their drugs and treatments work, people will buy them.
A more upbeat perspective has helped companies with good news. The competitive threat to the new hepatitis drug at Vertex Pharmaceuticals Inc. appeared to wane this year and shares of the Cambridge company climbed 48 percent.
How will investors react to bad news? Watch shares of Biogen Idec Inc. today for a solid clue. After the stock market closed yesterday, the Cambridge company confirmed two new cases of dangerous brain infections in patients taking its Tysabri drug to treat multiple sclerosis. Biogen Idec shares fell hard in after-hours trading yesterday.
Biotech stocks may offer investors some protection from a sinking economy. But they come with all kinds of other risks that can be much harder to anticipate.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 