It was a big week for the health care and biotech industries.
With a change in power in Congress, the Democrats have launched their "100-hour plan," which includes a focus on Medicare drug pricing and reversing the ban on stem-cell research. Also, California Gov. Arnold Schwarzenegger unveiled a plan for universal health care insurance for the country's most populous state.
On Thursday, a bill to reverse the ban on federal funding on research on new lines of embryonic stem cells passed the House by a margin of 253 to 174. While this may not immediately include enough Republican votes to override the president's veto threat, that may change after the U.S. Senate passes a more moderate bill and negotiates, in conference committee, enough compromises to capture a veto-proof majority of both chambers.
The stock market prices companies on the basis of where business conditions might be six months or more into the future. Drug discovery at biotechnology companies can take years, and the market sees a favorable legislative environment for these companies developing.
On the other hand, established drugmakers such as
are paying high premiums to buy smaller biotechnology companies in an attempt to replace drugs that are coming off patent protection.
While this may be good for holders of biotechnology stocks and funds, it has the potential to dilute the value of pharmaceutical companies. This, combined with an attempt by some members of Congress to reduce the revenue these companies receive from Medicare for their existing drugs, puts big drug stocks in a negative light.
The impact of Schwarzenegger's universal health care insurance plan for California on health and biotech stocks is less clear. Hospitals, for instance, would have to pay a 4% fee into the system, however it would eliminate most of the unpaid emergency room care given to the uninsured.
For drug companies, this may be a long-term positive, as children or adults who had previously stayed out of the preventive health care industry would be able to purchase prescription drugs. Or, if the critics of the plan are right, drug companies will produce fewer innovative new drugs if they are restricted on pricing.
was the big winner this week, climbing 2.84% in the five trading days from the close on Thursday, Jan. 4 to the close on Jan. 11.
The fund is designed to return 150% of the movement of the Dow Jones U.S. Biotechnology Index. With weightings of 80.0% biotechnology, 17.8% pharmaceutical, and 1.8% health care products stocks, the top holdings are
Next on the list is the exchange-traded fund
Biotech HOLDRs Trust
, which gained 2.63%. It holds the same companies listed above for BIPIX as its largest holdings, along with
. Almost 81% of the fund is concentrated in biotechnology companies and more than 15% in pharmaceutical stocks.
The health care fund that took the biggest hit this week is the
iShares S&P Global Healthcare Sector Index Fund
, an ETF that gave back 1.15% for the five trading days ending Jan. 11. The fund holds 18.0% in health care products, 8.4% in health care services and 6.7% biotechnology. But its largest concentration is in pharmaceuticals at 63.9%, including
Johnson & Johnson
With even more exposure to pharmaceutical stocks, at 94.8%, the
Fidelity Select Pharmaceuticals Portfolio is also seen to be at risk from the Democratic-controlled Congress' attempt to mandate that Medicare negotiate for lower prescription drug prices. The fund's top holding is Merck, followed by Pfizer, Novartis,
This has been a good week for funds holding biotechnology stocks. Plus, the long-term seems brighter with the health care industry spending considerable time and money looking inward to see how to become more efficient in the delivery of care and the purchasing of drugs and other health care products.
Unlike last week's
utility funds, health care and biotechnology funds have significantly higher levels of volatility. This accounts for the comparatively low ratings generated by our risk-adjusted return mutual fund model for the best and worst performers. If the president's threatened vetoes are sustained, the worst performers above could easily switch places with the best performers in the short run.
Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.