Bear Stalking Biotech Sector

The biotech sector saw a significant run-up last month, but for at least one analyst, questions remain about what the second half holds.

Mark Schoenebaum, a biotech analyst with Bear Stearns, cautioned Tuesday that on the basis of his research, he expects the sector's performance to be flat through the end of the year.

For the 20 trading days in July, biotech stock indices gained more than 10%. Among individual issues, Amgen (AMGN) was up 31%, Genentech (DNA) rose 10% and Genzyme (GENZ) jumped 25%.

According to Schoenebaum, historical trends indicate that "the biotech sector is unlikely to suffer a major correction over the next 3-6 months." But at the same time, the "data also indicate that another significant rally is unlikely this year," Schoenebaum wrote in a research note dated Aug. 1. He believes the sector "could remain range-bound" for the rest of the year.

Along with his colleagues, Schoenebaum, whose firm does and seeks to do business with the companies it covers, looked at the seven other instances when the Nasdaq and American Stock Exchange biotech indices were each up 10% or more for a 20-day period. Then they examined the performance of the component companies one month, three months and six months after those rallies.

Given his second-half assessment, the analyst recommends that investors dump the "basket approach" to the sector and take a closer look at individual companies' products, pipelines, sales and risks.

Finding Favorites

Looking at the earnings reported in the second quarter, this year's collective upside surprise from the combined results of three big biotechs was the largest it's been since 1999, Schoenebaum says in his research report.

Taken together, earnings from Amgen, Genentech and Genzyme were 16.25% more than consensus estimates, compared with 16.08% in the third quarter of 1999.