Biotech Stocks Ready To Soar?
No sector of the stock market brings out investors’ greed like biotechnology. And with good reason. The stories about fearless biotech investors making fortunes literally overnight are well known.
In fact, some of the market’s biggest winners so far this year come from the biotech industry.
No doubt about it, biotech stocks are generating phenomenal returns this year. Especially when you compare them to the anemic returns of the major market indices.
Year to date, the Nasdaq is up just 5.6% and the S&P 500 is higher by only 4.9%.
Even if you had taken a more conservative approach to biotech stocks, you’d still be doing better than the popular market index ETFs. For example, the SPDR S&P Biotech (XBI) ETF – a portfolio of 44 biotech stocks – has provided gains of 17% so far this year.
Why are investors so keen on biotech stocks?
For one thing, the stingy FDA is showing a greater propensity for approving new drugs. So far this year, the regulatory agency has approved 20 new drugs. That’s just one less than all of the drugs approved in 2010.
And the FDA is clearly on pace to approve more new drugs in 2011 than they have over the past few years.
Another reason for surging biotech stock prices is a huge uptick in investment in the sector. According to Ernst & Young, biotech companies in the US, Canada, and Europe raised an impressive $25 billion in 2010.
That’s nearly as much as the sector was raising in the years prior to the global financial crisis.
Clearly, the biotech sector is enjoying a rebirth of sorts. But if industry bigwigs have their way, this is just the beginning.
Here’s why…
At the end of June, the Biotechnology Industry Organization (BIO) concluded their annual meeting in Washington, DC. During the meeting, BIO unveiled their proposal for encouraging investment in innovation and speeding up the discovery of scientific breakthroughs.
The proposal is the result of painstaking work done over the past 12 months. And it reflects the input and suggestions from biotech CEOs, venture capitalists, government officials, medical researchers, patient advocates, and other experts.
According to BIO’s chief executive, Jim Greenwood, the consensus opinion is the industry needs an FDA “that is more interested in promoting new drugs than postponing them.” The regulatory process has become too unpredictable, time-consuming, and expensive he says.
The centerpiece of the proposal are 11 regulatory provisions designed to create “a 21st century FDA”.
First off, BIO recommends making the FDA an independent agency.
FDA Commissioners would be appointed to six-year terms to protect them from undue political influence. And the Commissioner could only be removed by the President for specific reasons like neglect of duty or malfeasance.
This greater independence would give the Commissioner more opportunity to focus on promoting innovation and scientific advances.
Several other key provisions would provide significant tax incentives to promote investment in the sector.
For example, the Angel Investor Tax Credit would provide investors with a tax credit equal to 50% of their investment in emerging biotech companies researching innovative technologies. And another provision would lower the capital gains rate for qualified investments in small biotech companies.
Most importantly, BIO would make it easier for the FDA to approve new drugs.
Right now a drug can be approved only if there is “substantial evidence” the new drug is effective. And the FDA typically requires two “adequate and well controlled” studies under this standard.
BIO’s proposal would allow the FDA to use a “weight-of-the-evidence” approach. In other words, the FDA could look at all data and information, whatever its value, and give each appropriate consideration.
If BIO’s proposal is ultimately accepted by Congress, it would usher in a new era of drug development for biotech companies. Investment in the sector would most certainly skyrocket. And we would likely see a larger number of new drugs approved each year.
You don’t have to be Warren Buffett to see such a favorable environment would create a raging bull market for biotech stocks.
If you don’t have any exposure to the biotech sector, you might want to take a look at XBI. It’s a great way to profit from the innovation going on in the industry.
Category: Stocks
