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What's Ailing Biotech and A Look at AMD


"Bore" equals no rally in this little corner of the world...


As I mentioned on the Buzz yesterday, I'm winging my way to Atlanta today for the American Urological Association conference. I had planned to write this on my laptop on the plane, but a late departure out of Seattle means my connection will be too tight to log in with my laptop from the Denver airport. That makes this the longest piece I've ever typed with my thumbs (Blackberry).

AMG reported this morning that healthcare and biotech funds saw their largest outflows since August 11, 2004. The NBI bottomed on August 9 at 622 that year -- a rally I missed because I was too concerned with macro issues to see the clear signs of a bottom.

And that's the rub for readers of Minyanville. Perhaps more than any other group, we've been well-informed on the ugly structural issues facing the market and the global economy. The lyrics have changed since 2004, but the backbeat is the same -- and at some point, most reasonable people agree, these issues will matter.

I can tell you they didn't matter in August 2004. I can't tell you whether they matter in May 2006. At least I can't tell you with any certainty. Perhaps they have always "mattered," they just haven't had any effect on investor behavior because the likelihood of higher prices outweighed the risks of the macro issues.

Now that we're significantly higher than we were in 2004, perhaps we should be paying closer attention.

Macro issues aside, it's not too difficult to understand what's ailing the biotech sector. Seasonal pressures were not relieved as per normal, partly because the typical "ASCO bounce" didn't materialize. I've noted on the Buzz that biotech hedge funds I've spoken with consider this year's ASCO a bore. "Bore" equals no rally in this little corner of the world.

We've also had a string of disappointments from data and the FDA. The most recent was the Indiplon debacle where a ton of people were caught leaning the wrong way. We have a fair amount of experience at BSR with drugs for the central nervous system, and honestly it pays to stay small in those names and add significant weight only upon clinical and regulatory success. Indiplon is also a lifestyle drug, which means regulatory scrutiny will be much higher than for a drug that, say, treats cancer or a (more) debilitating condition.

The stream of acqusitions we, and then others, predicted are occurring. The problem is they are mostly happening for private, not public, companies. The resulting relative overvaluation in the private sector is driving VC money into public companies, but this is not showing up in the popular averages because their targets are smaller, earlier-stage companies.

Lack of support for the averages tends to depress investor interest, contributing to the declines.

So when will the sector turn? We think we're near a bottom, but what we think doesn't really matter. If the market decides the macro issues matter now, your biotech investment will suffer outside the 20-50 stocks that will manage to go up in any one day. Frankly, most of your investments will suffer.

I want to follow up on one non-biotech item I've mentioned before...Dell (DELL) announced they would be using processors from Advanced Micro Devices (AMD) later this year. The proximate cause for this is AMD chose to play ball with Microsoft (MSFT) on 64-bit Vista and Intel (INTC) did not. Sure, Intel has 64-bit chipsets, but Vista was developed on and optimized using AMD chipsets during the critical front-end of the dev cycle. My sources inside Microsoft say Vista runs noticeably better on AMD chipsets than on Intel's silicon. It's been interesting watching this delinking of the "Wintel" franchise over the last couple of years to the point most Microsofties I know are hostile to Intel. Dell's announcement yesterday is only the most public manifestation of this trend.

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No positions in stocks mentioned.

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