The performance of the biotechnology sector during 2002 is dependant on the scale of global recovery...
The performance of the biotechnology sector during 2002 is dependant on the scale of global recovery, according to Caspar Rock, senior portfolio manager of the Framlington healthcare team.
Rock says the performance of biotech companies has, in the past, been closely related to the broader Nasdaq index, however in the last month it has not participated in the rally in tech stocks and is not seen as a cyclical sector to invest in.
He adds: 'Biotech bounced in in the fourth quarter of 2001 but it did not participate in the second leg of the technology rally. However, it is well placed and the news-flow should become positive.'
Rock cites two reasons why news-flow has improved and is likely to grow stronger still. He says sales have come through relatively strongly and further upgrades are likely for a number of companies in the sector. Secondly, a number of drugs have been granted approval by the FDA, which will help the sector.
Rock says valuations in biotech have fallen quite sharply from their December high of 967. As at 15 January 2002, the valuation of the Nasdaq Biotechnology index was 853. This fall offers an opportunity to invest, Rock says, with the potential for earnings and revaluations upside in second-tier biotech companies.
Recent history has shown that investors have opted to accept risk in the more cyclical areas of the market on the expectation of a return in global growth, a pattern that would not help biotech.
Rock says: 'If the market took a different view on the prospects of the US recovery ' for example, if it did not believe it would recover as quickly as expected ' biotech would outperform.'
Keith Broaden, joint manager of the Britannic Healthcare fund, says while there may be some consolidation in the biotech sector over the short-term, the fund remains overweight in the area.
Ignoring the very short term, Broaden says the fourth quarter of 2001 shows there is an increased appetite for risk, with the Nasdaq Biotech index up 22% during the period, outperforming the S&P 500 by approximately 10%.
Broaden expects the outperformance of biotech stocks to continue as people become more convinced the US will recover later in 2002 and the appetite for risk increases.
He says: 'While biotech is not a cyclical area, as it does not sell more or less due to higher or lower interest rates, it is still a higher growth and higher risk sector. While it may not participate in a cyclical rally, it would certainly be part of a growth rally.'
Broaden says that one of the best performing companies during fourth quarter 2001 was Medimmune, which was up 33% from 1 October 2001 to 16 January 2002. Another good performer was Genzyme, which was up 20% over the same time period.
Companies that Broaden likes going forward include Amgen and Cubist. He says that Amgen is entering a new phase of its growth, with the entry of its fourth product on the market. Cubist focuses on the anti-infective market.
Broaden says it is expected the FDA will appoint a Commissioner this year, a role that has remained empty for some months. This, he says has the potential to impact on sentiment, and may speed up drug approvals.
Nasdaq Biotech Index up 22% in Q4.
Newsflow to continue to be positive.
US expected to recover in second half of 2002.
Valuations come back sharply in Dec 2001.
Biotechs not involved in second leg of rally.
More consolidation expected in sector.
Tech stock concerns
DB and a lack of alignment
Encouraging better use of tech
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