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Nasdaq Taps Biotech to Anchor Its Foundering 100

Two dot-coms will be replaced Thursday, while others teeter below $1.
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They once cavorted with the elite of the tech world. But come Thursday, two Internet stocks, now the faded symbols of an exuberant age, will be dropped from the

Nasdaq

100 and replaced with biotech firms.

How much stability that will confer on the battered but still heavily traded index is a matter of some debate.

Specialty pharmaceuticals firm

Andrx

(ADRX)

will take the spot occupied by

Excite@Home

(ATHMQ)

, which filed for bankruptcy protection last Friday and is now halted until the company provides Nasdaq with "additional information." Also on Thursday, biotech concern

Gilead Sciences

(GILD) - Get Report

will replace

Exodus Communications

(EXDSQ)

, the beleaguered Web hosting company that now lingers at 17 cents a share.

Shares of Andrx closed Tuesday at $71.90, while Gilead, which was halted ahead of a Food and Drug Administration review of its experimental drug Viread, last traded at $56.62.

A Makeover

"Moving biotech in there or some other aggressive Nasdaq sectors to replace some of the beaten-down once-highfliers, will make it a viable index to invest in at some point," said Barry Hyman, chief investment strategist at Ehrenkrantz King Nussbaum. He called the index "very damaged" because of its reliance on tech stocks. "It's got to redefine itself."

The Nasdaq 100 is an index of the largest non-financial stocks in the Nasdaq Composite, weighted according to market cap. It is heavily speculated upon by investors via the

QQQ

(QQQ) - Get Report

, a tracking stock that has lost 46% since Jan. 2. To make the list, a stock must meet certain criteria, including having a minimum average daily trading volume of 100,000 shares, and being listed on the Nasdaq for a "seasoned" period of at least two years. As of Oct. 1, the top three spots by market cap belonged to

Microsoft

(MSFT) - Get Report

,

Cisco

(CSCO) - Get Report

TST Recommends

and

Qualcomm

(QCOM) - Get Report

.

Hyman, who invests in the

Nasdaq Biotech Trust

, an exchange-traded fund with more than 70 biotech stocks, believes tech bellwethers like Cisco and Microsoft still command too much weight in the index, even though they're sharply off their highs. A move towards including other stocks like Andrx and Gilead, "two of the more advanced stocks" in the drug and biotech sector, is a move toward stability, he added, although the companies are hardly behemoths. Andrx has a market cap of $5.04 billion, while Gilead carries a market cap of $5.39 billion. Microsoft and Cisco's market caps are $286.6 billion and $84.02 billion, respectively.

But John Bollinger, stock market strategist at EquityTrader.com, is more skeptical. "It's interesting that it follows market fashion," he said. "As big tech stocks get into trouble, the place that people put money into is biotech." Bollinger said most stock indices have a "relative strength bias," meaning they pick the flavor of the month. "But what often happens is that stocks are selected after they done well," he said, and often "it means that when they're included, they face a period of subpar performance."

Stocks fall out of an index for going too low -- never for going too high. Bollinger warned that as a result of their selection process, many indices show "a better overall pattern of returns than the universe they're supposed to mirror." He said: "Investors really need to carefully consider not only the construction of the index, but the methodology for the selection of members of the index."

A Nasdaq spokeswoman said, "Apart from extraordinary circumstances, the reconfiguration is done once a year, usually in December."

BroadVision

(BVSN) - Get Report

,

McLeodUSA

(MCLD)

(which issued a profit warning Wednesday) and

Metromedia Fiber Network

(MFNX)

are three stocks in the Nasdaq 100 trading below $1. Nasdaq recently

relaxed its delisting rules in a bid to "provide more stability to the marketplace."

The Next New Thing?

Biotechs have been compared to Internet stocks. Many don't have earnings, as their products may still be years away from completion or approved. "You definitely have your waves of overvalued behavior and undervalued behavior in biotech," said Hyman, and "my advice is to never play the momentum equation of biotech, because you're just chasing prices and not being very cognizant of where a company is in terms of development." But "a good deal of them will also be major drug providers," Hyman said.

Hugh Johnson, chief investment officer at First Albany, said while biotechs were certainly volatile and speculative in the 1990s, many have become stable companies with predictable sales and earnings.

Observers believe Gilead's new HIV drug, Viread,

will soon receive Food and Drug Administration approval. The company, which posted a wider-than-expected loss in the second quarter, "has a lot of near-term catalysts," said analyst Scott Stromatt from C.E. Unterberg Towbin, who rates the stock a buy and has a $70 price target. His firm hasn't done any underwriting for Gilead.

According to analyst Jerry Treppal of Banc of America Securities, Andrx has stable products and a "very bright future," especially if it succeeds in getting approval for its generic version of ulcer drug Prilosec.

AstraZeneca

(AZN) - Get Report

holds a license on the patent, which expires at the end of this year. Treppal, who has a buy rating and a $92 price target on Andrx, expects the company to get court approval early next year to start selling the drug. "It's trading a lot on the perception of Prilosec, and that case is moving along," he said. Treppal's firm has done underwriting for Andrx.

"It's kind of interesting that you have pharmaceutical companies replacing dot-coms," said Johnson. "But it doesn't surprise me. It gives you the sense of what kind of companies are stable and what kind are not."