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Biotech Pulls Back


Hey pharma, get out that check book and give me a hand


Since we let out some of our exposure to the overall biotech market exactly a month ago, the biotech market has weakened noticeably. Trying to determine whether this is serious or not occupies a fair amount of our time these days given our overall thesis and larger than normal exposure currently.

Technically, the NASDAQ Biotech Index (NBI) has 800 as minor support and 775 as more solid support. Either is not an insignificant drop from here. My guess is 800 will hold as we're due for the buying pressure that comes in ahead of most ASCO meetings.

I wanted to share a few things I think are responsible for this drop to help Minyans understand our current thinking on the sector.

Last year, the accounting standards board FASB set December 2006 as the effective date for a new set of purchase accounting rules that I felt very strongly would boost the rate of acquisitions in biotech. FASB backed off the effective date, though, because of complaints about unrelated segments of the rule. As I wrote back when FASB backed off the 2006 effective date, I still believe this rule will drive acquisitions, but the chances for a feeding frenzy are reduced. A relatively long stretch of time without a Vicuron-scale biotech acquisition has dampened enthusiasm.

At some point, the dismal approval ratings for the Bush Administration have to matter in the voter's booth. While one should never underestimate the Democrat National Committee's (DNC) ability to snatch defeat from the jaws of victory, I have to believe the Dems have a shot at capturing one or both houses of Congress.

I do not expect this to matter much to the biotech sector yet as most of the DNC stuff that one would expect could hurt the sector will fail under Bush's veto pen. Nevertheless, noise from initiatives like making pharmacoeconomics an approval metric can damage the sector even if they don't become law.

We've already seen politics interfere with the confirmation of Dr. Andrew von Eschenbach as the permanent head of the FDA. As I wrote in a Minyanville op-ed piece a few weeks ago, Senators Clinton and Murray are essentially protesting the politicization of FDA drug decisions by holding cancer patients hostage to their politics. It's the kind of oxymoronic double negative you only see in government and the most dysfunctional corporations.

I am worried about gas prices. Local pump prices have reached $3 for super unleaded, up $0.50/gal during March. Diesel is also $3 at gas stations in affluent neighborhoods here. Speculators are already moving into the gasoline markets in the sick hope we have a repeat to last year's hurricane season. Fortunately, biotech is part of healthcare and the healthcare sector is traditionally a safe haven when the economy goes sour. If that happens, we could see a miniature repeat of the 2000 phenomenon where biotech broadly outperformed the market in the second half of that year as tech funds flocked to the only tech that was working – biotech. But the wreckage ahead of that is usually poison to all sectors initially.

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No positions in stocks mentioned.

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