The biotechnology sector has rallied over the course of 2003 following several successful drugs tria...
The biotechnology sector has rallied over the course of 2003 following several successful drugs trials but large cap pharmaceuticals remain depressed.
The S&P 500 Biotechnology Index posted growth of 30.9% between 31 December 2002 and 3 June 2003, in dollar terms, compared to a 10.13% return from the S&P 500 and a 2.7% return from the S&P 500 Pharmaceuticals Index.
While biotech has strongly outperformed pharmaceuticals over the calendar year to date, opinions diverge as to where the value lies looking forward.
Marjan Daeipour, manager of the M&G Global Healthcare fund, says the biotechnology rally seen over 2003 was in part cyclical, but also driven by a number of successful drug trials, particularly in the field of cancer treatment.
The market was surprised by the success of Genentech's Avastin drug, Daeipour notes, leading to strong trading volumes in part due to hedge funds covering their short positions. The drug proved successful when used in conjunction with chemotherapy to stem the spread of colorectal cancer after previously failing trials for usage in the treatment of breast cancer.
Neil Birrell, chief investment officer at Framlington, says the group's Healthcare fund is currently overweight biotechnology and has enjoyed strong performance from a number of holdings in the sector in recent months.
Birrell notes the approval of Millennium's Velcade drug, for use with sufferers of the blood cancer multiple myeloma who have failed at least two other therapies, also contributed to the bullishness of the sector.
'The approval of Velcade came earlier than many expected and means Millennium will actually record sales for the drug this year,' he says. 'The speed of the approval is good news not only for Millennium but for other biotech companies looking to get new drugs onto the market.'
That said, Birrell acknowledges any uptick in investors' risk aversion would hit the sector, while Daeipour also queries whether there is any further upside to the sector in the short to medium term following the recent rally.
She is favouring pharmaceuticals over biotechnology on this valuation basis. Large-cap pharmaceuticals have been surrounded by negative sentiment following action by the US Supreme Court regarding the provision of discounted drugs to all of the state of Maine's residents who lack medical insurance, not just those on Medicare.
There is confusion surrounding the ruling, however, and what impact it may have on the profitability of pharmaceuticals. The Supreme Court was lifting a lower court provision, preventing the state from forcing drug companies into supplying discounted drugs to those who fall just above the Medicare threshold but cannot afford treatment, rather than creating law.
As such, it is unclear whether a precedent has been set and as the discount, if applied nationally, would lead to discounted medication for around 12 million people, Birrell and many others have underweighted the sector.
Daeipour believes this is an opportunity to pick up quality stocks on low valuations, however.
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