Betting On Biotechnology

Biotech funds may have a bright future ahead in spite of a down 2001

If you’re looking over mutual funds that focus on biotechnology stocks, you may find yourself in a quandary. On the one hand, the industry is loaded with potential, having dazzled the stock market in 2000. On the other hand, biotech stocks had a rough 2001. So what comes next?

There’s no arguing the medical and stock market miracles that the biotech sector has pulled off over the last few years. We’re familiar with some of the fantastic accomplishments companies in the field seem to announce daily. Their work on gene splicing has developed treatments and medications for everything from AIDS to cancer. Until 2001, shares of biotech companies had been equally awe-inspiring. Biotech has been a monster of a group over the past few years. According to the Standard & Poor’s Biotechnology Index, a group of 22 biotech stocks generated a gain of 104.6% for investors in 1999 and another 17.1% in 2000. That same index has averaged annual gains of 28.0% for the five-year period ending December 14, 2001.

In the market turmoil throughout 2001, biotech shares were down. As of December 14, 2001, the group was off 9.8%, better than the -13.4% the S&P 500 Index had managed since the beginning of 2001. In fact, of the 15 biotech mutual funds Morningstar tracks, not one produced a positive total return last year. Most had losses of 20% or more in 2001; some had lost as much as 30%.

Still, Standard & Poor’s biotechnology analyst Frank DiLorenzo says there are a few reasons why biotech might be headed back to a future of impressive stock market performance. For one, the industry has a pipeline of new products working their way to the healthcare market. “There are some significant new treatments that have recently been approved by the Food and Drug Administration, and they should start to make a real impact on biotech companies’ bottom lines,” says DiLorenzo, who expects treatments approved between now and 2003 to generate peak annual sales of $10 billion by the end of the decade. That figure is more than the revenue that the top 10 publicly traded biotech firms generated in 2000 — including industry players such as, Amgen (Nasdaq: AMGN), Genentech (NYSE: DNA), Chiron (Nasdaq: CHIR), Biogen (Nasdaq: BGEN), and Immunex (Nasdaq: IMNX). It’s little wonder that Wall Street pegs the biotech sector to grow earnings to a robust 35.3% annually over the next five years, according to Zacks Investment Research in Chicago.

Keep in mind, too, that there has recently been plenty of wheeling and dealing in biotech. This past December alone, Amgen made an $18 million bid for Immunex, while Millenium Pharmaceuticals, MedImmune, and Cephalon all submitted buyout bids for other companies in the sector. DiLorenzo says investors should expect more of the same. That’s good news for biotechnology mutual funds. Takeovers, after all, boost the value of the shares of the companies being bought.

To help you get in on what could be a hot trend in the years ahead, we tapped Morningstar’s database of

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