How will biotech fare in 2012

Filed under: Biotech ETF

The AMEX Biotechnology Index ended 2011 at 1091.42 as against 647.17 at the end of the year 2008 reflecting again over a three year period of just under 70%. During this three-year period, the biotech sector outperformed the broader market because the NASDAQ Composite Index only gained about 65%.For a number of reasons, the outlook for the industry in 2012 remains bullish.

During troubled economic conditions, biotech is often perceived as a great defensive investment because people continue to fall ill regardless of whether economic conditions are good or bad. Despite all the advances in modern medicine, there is a continuing need to improve existing products or develop new products and a large number of categories ranging from diabetes to cancer. The sector has an important role in the development of the US economy because improved medication means improved health care and improved life expectancy which in turn leads to higher productivity and more jobs. Despite the intense debate about the American healthcare system, many experts believe that a reduction in mortality rates has a present value that can be measured in billions of dollars and significantly improves economic conditions.

Another major factor that has a major impact on the sector is the speed and efficiency with which new drugs are approved. In the year 2008, resource allocations to the FDA were bolstered to help them with the new drug approval process. However, employing in training hundreds of people takes time and the full benefit will be felt in the year 2012 in terms of increased efficiency and quicker processing. The total number of approvals for new molecules and biologic licenses totaled 35 in the year 2011 compared to 21 approvals in 2010. Those approvals included some important ones for diseases such as cancer and melanoma.

There’s also good news on the drug pipeline and investment fronts. The Pharmaceutical Research and Manufacturers of America reports that there are a record number of more than 900 biotech products in the development stage in the US alone. More than 20% of these products are aimed at infectious diseases while another 30% are aimed at cancer. One worrying factor that needs to be addressed is that despite the considerable increase in expenditure on R&D, new drug approvals have not kept pace. On the funding front, three new funds dedicated to biotech companies to in excess of $1.5 billion which should provide plenty of new capital for the industry. Increased venture capital participation is also anticipated because in the year 2011, venture capital commitments to the sector were up 22% over the previous year.

In view of these prospects, you should seriously consider some exposure to the biotech sector especially if you can tolerate the higher risk of investment. For the retail investor, we would recommend the ETF route because diversification and better risk control are available for a modest outlay. You will also be free of the worries of day to day management of your investment for which you may have neither the time nor the knowledge.

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