Biotech 2005: New Drugs Hold the Key

It wasn't always pretty, but the biotechnology sector closed out 2004 on a positive note, with some good momentum running into 2005.

The Amex Biotechnology Index closed at 549.69 Tuesday, up more than 11% for the year, besting returns of the three major market indices. The Nasdaq Biotechnology Index, a broader measure of biotech sector returns because it includes more small- and mid-cap stocks, finished at 774, up a less robust 5.8%.

Big-cap biotech stocks, by and large, were stronger performers than their small-cap brethren this year, which partly explains the divergent performances of the sector's two major indices. Biotech stocks with market caps in excess of $1 billion turned in positive returns this year, while biotechs with sub-$500 million market valuations posted negative returns, according to Banc of America Securities.

Handle With Care

Biotech is a volatile business and 2004 was no exception. The list of blowups this year is topped by Genta(GNTA), which saw its controversial cancer drug Genasense rejected by an FDA advisory panel in May. Other losers in the stock-return category this year, for various reasons, included Maxim Pharmaceuticals(MAXM), InterMune(ITMN) and Millennium Pharmaceuticals(MLNM).

A biotech IPO window that first creaked open in late 2003 hit its stride in 2004, with 30 new issues raising approximately $1.8 billion -- the most since the biotech bubble year of 2000. But while a lot of money was raised by fledgling companies in the sector, the aftermarket performance was not something to trumpet.

Only Eyetech Pharmaceuticals(EYET), which went public at $21 in January and is now up 113% for the year, is listed among the best-performing IPOs of the year. Meanwhile, the biotech sector can count three companies -- Corgentech(CGTK), Corcept Therapeutics(CORT) and Cytokinetics(CYTK) -- on the worst-performers list.

Looking ahead to 2005, the U.S. government will (for the most part) lower reimbursement rates to doctors for drugs administered to Medicare patients in their offices. While there already has been much discussion and investor reaction to the new Medicare reimbursement plan in stocks like Amgen(AMGN), Genentech(DNA) and Biogen Idec(BIIB) -- to name a few -- the market will finally get to see if it changes drug usage trends in any meaningful way.