I really don’t write enough about the biopharmaceutical market, which in tough economic times, can be a good defensive play relative to the rest of the market – even when compared to uniform technology stocks.
My reasoning is simple. We have illness, disease, and injury in good economic times and in bad ones, too (in fact, one could well argue that stress and worry contribute to even greater periods of illness in tough economies). I recognize that the field of health technology has come up with some wonderful applications that help people fare better when they’re sick or injured.
Case in point, the robotics (minimally invasive surgery) surgical application I wrote about last week. Robotics outcome studies show that patients come out of such surgeries with better immediate health, shorter recovery times, and shorter hospital stays. Not bad.
Such medical technology breakthroughs are good reason why the NASDAQ Biotech Index fared better – much better – than the Dow Jones Industrial Average, the S& P 500, and the larger Nasdaq Composite in 2008.
But you have to be careful about putting most or all of your money in a single biopharm stock. Look at the curious case of Viropharma (VPHM). Earlier today (Monday), news came that the firm’s experimental drug maribavir failed to reduce viral infections in patients undergoing bone marrow transplants, according to results of a phase III study announced Monday.
The long and short of it was this: In the phase III study, there was no difference between maribavir or a placebo in reducing the rate of cytomegalovirus (CMV) disease in patients undergoing bone marrow transplants, according to company statements.
Needless to say, Viropharma execs were distraught. "We are extremely disappointed by the outcome of this pivotal study," said Vincent Milano, ViroPharma's president and chief executive officer. "We just received these data and there are far more questions than answers; we still have a significant amount of work to do to fully understand this outcome and its impact on the overall program."
After the news went pubic, shares of ViroPharma fell 50%, and had to suffer a stop in its trading after sellers overwhelmed the market.
The lesson here? Biopharm companes, when taken together in an exchange-traded fund or even a mutual fund, can be a valuable backstop in a lousy economy. But taken one at a time, especially for smaller firms that have their bellwether products still in clinical study mode, putting a lot of money to work on any one of them can lead to portfolio disaster.
The good news? There is no shortage of solid biotech ETF’s, all with cheap fees and all with a history of strong relative performance, especially in down economies. Focus on SPDR Biotech ETF (NYSE: XBI), PowerShares Dynamic Biotech & Genome (NYSE: PBE), iShares NASDAQ Biotechnology (NYSE: IBB), First Trust AMEX Biotechnology (NYSE: FBT), and the Biotech HOLDRs (NYSE: BBH).
Take the time to research each one; they vary in the amount of stocks they hold and how aggressive they get. But, for a defensive technology play, biotech ETF’s are a good option in a recession.