No slowdown for buoyant biotech

Aug 22, 2008

Most sectors in the market may be struggling, but there is still one out there thriving on buyout fever: biotech. The Nasdaq Biotech Index is up 11.5% this year, despite a 11.9% drop in the S&P 500. Why? Because big, well-capitalised pharmaceutical firms are swooping on undervalued players in the sector as they look to get their hands on potential new products in the cheapest way possible.

Last month, Roche offered $43.7bn for biotech pioneer Genentech Inc, followed one week later by a $5.2bn bid from Bristol-Myers Squibb for ImClose Systems, a maker of anti-cancer vaccines. Its share price jumped 40% in one day. On this side of the Atlantic, French giant Sanofi bought UK vaccine maker Acambis last month for £276m, while shares in the Cheshire-based firm Protherics soared 44% after reporting several approaches last week.

For the big pharma firms, the biotech market is "like being in a candy shop", says Francesco De Rubertis of venture capital firm Index Ventures on Reuters. Prices of biotechs are so low that they regularly pay 50%-100% premiums for the right businesses – proof, say the bulls, that the market is mispricing the sector. So much so, in fact, that despite the recent mini-bull market, now's a great time to get in, says Samuel Isaly, manager of the Finsbury Worldwide Pharmaceutical Trust in the FT. "July was a comeback month after several years of under­performance. We believe there will be no slowdown in mergers and acquisition activity." Andy Smith of the AXA Framlington Biotech fund points out that as most biotechs are US-based, buying into the sector is also a good way to play the rebound in the fortunes of the US dollar.

Isaly has identified another 24 biotech firms that could soon find themselves takeover targets, suggesting this is one market that should remain buoyant for several months to come. One of the easiest ways to do this is by tracking the Nasdaq Biotech index with the iShares NASDAQ Biotechnology Index ETF (AMEX:IBB). In Britain, one investment trust worth a look is the Biotech Growth Trust (LSE:BIOG), which trades on an 8.4% discount to its net asset value. Among its top ten holdings is Gilead Sciences, which recently won US approval to promote its drug for hepatitis B. A play on both big pharma and biotech is the Finsbury Worldwide Pharmaceutical Trust (LSE:FWP). It holds both Genentech and ImClone systems, as well as big players in the pharmaceutical industry, such as Novartis. It's up 16.7% this year, but is still on a 6% discount.

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