Look at This Top Shelf Biotech ETF

06/22/2012 11:15 am EST

Focus: ETFs

Nicholas Vardy

ETF Strategist, Oxford Club

If you're after a shotgun approach to biotechs, then this exchange traded fund may be worth a look. And if you're looking for specific biotechs, it's a good idea to see what this excellent fund thinks are the best biotech names out there, observes Nicholas Vardy in The Alpha Investor Letter.

An improving global economy, better access to research and development (R&D) funding, an improving regulatory climate, and the expanding use of biotech in medical sciences are driving the current bull run in biotech.

But investing in biotech stocks is a lot like investing in small-cap mining stocks or Silicon Valley start-ups. You have to kiss a lot of investment frogs before you find your “prince,” like Google (GOOG) or Facebook (FB).

If the original California gold rush was led by miners with picks and shovels, the biotech “gold rush” of the 1980s was more about Stanford University and the University of California-Berkeley scientists poring over test tubes in white lab coats.

Founded in 1976, San Francisco’s Genentech was the industry’s poster child, attracting a flood of “me-too” imitators. But it turned out that biotech is a lot more “hit and miss” than investors first thought.

Biotech stocks have actually had four massive, triple-digit percentage bull markets since the 1980s. Among the two biggest ones, the first occurred in the early 1990s, when biotech stocks soared almost tenfold. The second came later during the dot-com boom, when the Nasdaq Biotechnology Index rose 457% from the end of August 1998 to the end of February 2000.

But having been burned by dozens of investments that “went south,” investors never regained the enthusiasm for biotech that they had in the 1990s. Over the past five years, the biotech sector has still done well relative to the stagnating S&P 500, with iShares Nasdaq Biotechnology (IBB) significantly outperforming the S&P 500 over that time period.

Here’s a brief rundown of IBB’s top five largest investments, which together account for 33.86% of its total holdings:

Rengeron Pharmaceuticals (REGN)
The key product here is EYLEA for the treatment of neovascular age-related macular degeneration. Advanced macular degeneration is a common eye condition among people age 50 and older. It is the leading cause of vision loss in older adults.

On the list awaiting FDA approval is Aflibercept, commonly referred to as Zaltrap—a protein fusion agent developed in partnership with Sanofi Aventis (SNY). The drug aims to prevent angiogenesis of blood vessel development into tumors. (REGN accounts for 7.63% of IBB’s holdings.)

Amgen (AMGN)
One of the pioneers of the biotech world, boasting a relatively mature business with stable cash flow and a healthy dividend yield.

Acting much like Big Pharma, it has focused on acquiring emerging-market generic drug companies, partnered with Watson (WPI) for biosimilars development, and out-licensed non-core drugs to AstraZeneca (AZN).

In the recent past, Amgen has acquired Micromet for $1.2 billion, KAI Pharmaceuticals for $315 million, and BioVex for $425 million. It also acquired Bergamo for $215 million in Brazil and Turkey’s MN Pharmaceuticals. (AMGN attracted 7.38% of IBB’s holdings.)

Alexion Pharmaceuticals (ALXN)
This company has a leading drug called Soliris, a $500,000-a-year pharmaceutical approved to treat paroxysymal nocturnal hemoglobinuria (PNH), an ultra-rare red blood cell disease. Along with the US, Soliris is approved for PNH in the European Union (EU), Japan and many other countries.

Alexion is also expanding Soliris’ label—that is, the diseases Soliris can be used to treat, such as atypical Hemolytic Uremic Syndrome (aHUS), an ultra-rare, chronic and life-threatening disease. (ALXN represents 7.32% of IBB’s holdings.)

Celgene (CELG)
Focuses on treatments for cancer and immune inflammatory diseases, primarily in the US and Europe. Abraxane has already been approved by the FDA for the treatment of breast cancer, and the FDA will decide whether to extend it to lung cancer treatment in October.

Other FDA-approved drugs include Revlimid, for the treatment of multiple myeloma and MDS; Vidaza, for the treatment of MDS and acute myeloid leukemia; Thalomd, for the treatment of multiple myeloma; and Istodax, for the treatment of a specific form of T-Cell lymphoma.

Celgene also has a long pipeline of drugs in various clinical trial stages under the categories of hematology, oncology, inflammation and immunology. (CELG has netted 5.83% of IBB’s holdings.)

Gilead Sciences (GILD)
This firm has skyrocketed since 1987 to become a leading biopharmaceutical company with a portfolio of 14 marketed products and a growing channel of investigational drugs.

Growth prospects of Gilead’s HIV drugs Truvada and Atripla look very promising. The company continues to expand with collaborations, by making acquisitions and introducing new products. (GILD’s share of IBB holdings is 5.70%.)

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