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Biotech Roundup: Bayer, Market Short Interest, Bad Year For Approvals, Contrarian View

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Congress will be more bark than bite in 2007

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Bayer to Buy Biotech

Bayer
(BAY) says it will aggressively expand its biotech portfolio. If you read my article from Wednesday, please note the target areas for Bayer are all specialty drugs. Bayer has been vocal about its desire to add additional drugs to its pipeline via acquisition (see also Schering AG) or partnership. It is not alone. Most weeks there are two to three articles such as this one with a pharma or biopharma CEO saying they will be acquiring new products by buying or partnering with biotech companies – not to mention the news stories about partnerships and acquisitions that have been consummated.

Market Short Interest

For most of the past two years, I've written a monthly piece for Minyanville about short interest on the NASDAQ and NYSE. In the latest installment, which you can find in the "Macro data" section here, it looks like the pattern of short interest suggests two more months of market gains followed by a decline. That suggestion could change quickly if the short interest patterns change, of course.

Yes, it was bad year for approvals...

If you thought it seemed like there wasn't much success in the drug industry in terms of drug approvals, you were right. At just 18 new drug approvals in 2006, it was close to an eight-year low in approvals. This Bloomberg article suggests the issue was targeting tough diseases, and it quotes a Harvard professor as saying it was the lack of a good R&D effort.

Allow me to submit the problem also resides with an FDA bowing to political pressure to approve only those drugs with no recognizable serious risks. They don't exist, of course. Until the risk/reward benefit gets back into line with the reality that any drug will kill someone if you give it to enough people, drug approvals will be more rare than investors hope.

What's your defense to this trend? Take profits or hedge ahead of binary approval events. Perhaps counterintuitively, focusing on earlier-stage biotechs with very small market caps might be safer (more on this at a later date). Oh, and cross your fingers that new FDA Commissioner Dr. Andrew von Eschenbach will exercise some adult supervision.

Contrarian View

The beginning of the year is when analysts like to launch new coverage. It doesn't interfere with their scores from the prior year and everyone seems to be looking for new ideas when the calendar switches years. My firm does the same thing, as the beginning of each year is usually heavier for new initiations for us as well.

After this glow wears off, expect to read consistently negative notes concerning the impact of Congress on healthcare stocks. I addressed this briefly in my article earlier this week. I believe we will get much more smoke than fire in the next 100 days. The goal of this Congress is not to pass far-reaching healthcare legislation, only talk about it to get each side on the record. Why bother? Because the 2008 Presidential campaign has already started. I expect the Democrats want to use healthcare as a major wedge issue for the 2008 election and they can't do that if they successfully pass meaningful legislation.

The contrarian approach, therefore, might allow you to cherry-pick a few companies at valuations lowered due to others fretting about new rules that are unlikely to appear before 2009.
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No positions in stocks mentioned.

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