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.
Analyst James Reddoch of Friedman, Billings Ramsey said biotech got a jump-start in June after the drug company Pfizer Inc. agreed to buy a small Pennsylvania company, Vicuron Pharmaceuticals Inc., for $1.9 billion, paying 84 percent more than Vicuron stock was selling for before the offer.
The logic: If Pfizer thought Vicuron was worth that much more than Wall Street valued the stock at, other biotechs probably were also undervalued.
Takeovers will continue to play a big part in biotech investing, Reddoch said. "Pharmaceutical manufacturing companies need access to new products; there's no better way to get them than just going out and buying the company" that is developing a new drug.
Biotech investors always have moved in herds, meandering regularly in and out of industry stocks. But now the herd acts more like a wolf pack -- pouncing, chewing up profits and running on.
Nash at Legg Mason said that's the effect of the hedge funds, investment pools that try to earn much higher profits than can be made by conventional buy and hold investing. Long-term investors may think about where a stock will be a year from now, but the hedge funds' horizon is next week or next month. Trading big blocks, they move in and out of stocks, even whole sectors. They try to be the first to buy a stock that's starting to move and usually are the first to sell when they see the move running its course.
The result, Nash added, is "a little bit of over-exuberance in trading patterns. The sector is a bit more volatile than it used to be."
Unlike most individual investors, hedge funds don't just bail out of a stock to protect their profits when they see bad news; they try to make more money on the way down. Often that means selling the stock short, a strategy that involves borrowing shares and then selling them. If the stock falls, the short-seller can buy back the shares at a lower price, give back the borrowed stock and pocket a profit.
Short-selling tends to make stocks fall faster than they otherwise would, producing avalanches like the one that all but swept away Human Genome Sciences Inc. of Rockville, the biggest local loser in the October sell-off.
Human Genome Sciences' stock tanked Oct. 5 after the company reported that its drug to treat lupus had fallen short of expectations in an important round of human testing.
The stock fell nearly 30 percent in one day, the worst single-day loss in the 13-year history of the company, which has yet to bring its first drug to market.
On the other hand, the influence of active trading can be seen in a phenomenon that's become more frequent in biotech: A company will announce an important but long-anticipated development and its stock will barely budge.
What ordinary investors saw as "news" was already factored into the price of the stock as far as the pros were concerned. So when investors who came late to the party stepped up to buy, they bought from pros who figured now was the time to cash out. The stock had already made its move.
Reddoch says the recent biotech sell-off shouldn't be considered an October surprise. "These stocks have been on a very strong run since June," he said. "People were just taking some profits."
Noting that biotech stocks recovered some of their losses, along with the overall market, at the end of last week, he said that suggests investors realized the market had overreacted. Prices fell so much that people started buying again.
Now, Reddoch and Nash predict biotechnology stocks will respond to the catalysts that usually move the sector higher in the final months of the year -- the research papers presented at those annual medical meetings.
The hedge funds and professional biotech investors are already handicapping the meetings, trying to parse which companies are going to make market-moving news and which are going to report developments that are already baked into their stock prices.
A few basic lessons for investors emerge from the trickier-than-ever biotech sector.
First, buying a biotech stock based on headlines about a medical breakthrough is rarely a smart move. The pros already own the stock and will probably make a profit by selling it to you.
Second, picking biotech winners is too hard a trick to try at home. Better than one or two biotechs, buy a basket of the stocks to diversify your risks.
Jerry Knight can be contacted at email@example.com.