A Chill Hits Feverish Biotech Stocks

By Jerry Knight
Monday, October 17, 2005

Every fall, the biotechnology industry used to get a predictable lift from an annual conference on infectious diseases where biotech companies report their latest drug research. A hint of success in the lab or in patient testing for one or two new drugs would elevate the whole risky sector.

But this year the conference was scheduled for New Orleans, and it was blown away by Hurricane Katrina -- rescheduled, as it happens, for the Washington Convention Center in December.

The postponed meeting is one of the reasons why biotech stocks have taken a nasty dive.

After outperforming the market over the summer, biotech stocks have fallen even faster than the rest of the retreating market since Oct. l. The Standard & Poor's 500-stock index has declined 3.4 percent in the past two weeks, while the S&P biotech index retreated 4.3 percent.

Along with the hurricane, analysts say, biotech has been shaken by increasing investment from hedge funds whose big, brief, in-and-out bets on biotech stocks have added more uncertainty to what was already a volatile, cyclical market.

"Since hedge funds have become bigger players, it's very difficult at any given time to make any sense out of changes in the industry stocks," says Edward H. Nash, the biotech watcher at Legg Mason Inc. "Even making great guesses on the science, you can't get the trading mechanism down."

Biotech investing has never been for the faint of heart or the lazy. The homework is hard. You have to understand the cutting-edge science involved in developing drugs, chart the complex regulatory route that all new treatments must traverse and calculate the economic payoff from medical breakthroughs -- if and when they occur.

This year, analysts say, investors have had to cope with new stock market patterns that made it even harder to decide when to buy or sell.

Biotech stocks used to undergo a meltdown every summer, then recovered through the fall as companies delivered their latest research at a series of medical conferences.

The fall cycle started with what the industry calls "Ick-Ack" -- the Interscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC) -- the meeting now scheduled here for December. After "the liver meeting," the blood doctors' convention and others, the industry's Super Bowl came in January at an industry investment conference. Waiting for the big fall debuts, investors ordinarily shied away from biotech over the summer.

But this summer, the stocks went gangbusters, surging ahead of the market.

While the Nasdaq Stock Market composite index gained 5 percent in the third quarter, the American Stock Exchange biotech index jumped 15 percent and the S&P biotech index leaped 24 percent.

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