Biotech Heats Up in the Fall

10/25/2007 12:00 am EST

Focus:

Michael Murphy

Former Editor, New World Investor

Michael Murphy, editor of New World Radar Report, says biotech stocks post big gains at this time of year—and he finds one stock he thinks could benefit.

With the equinox just behind us, this is a timely update because fall is the best time of year for biotech stocks. Over the last 20 years, the AMEX Biotech Index (BTK) has compounded at 16% per year, and 80% of the gains come in the fall. Nineteen out of 20 years, the BTK rose in the last half of the year. The numbers are similar for the NASDAQ Biotech Index (NBI), which was up five of the last six years for the September to November three-month period, averaging a 9% gain.

Why do biotech stocks go up about now? There are so many annual medical society meetings and biotech brokerage firm conferences between now and January that it sometimes seems like companies time their clinical trials to conclude in time to have data ready for the fourth quarter. We'll also see filings [with the Food & Drug Administration] before year-end, so companies have something to brag about in their shareholder letters.

But with only a couple of exceptions, we don't need the FDA to do anything other than keep their special protocol agreements. What we are looking for is clinical trial or marketplace results.

Geron (NASDAQ: GERN) has been in a $6 to $9 range for a year, perhaps showing the impact of Federal policy on embryonic stem cell research. However, no matter which party wins the 2008 election, the bans are likely to be loosened or eliminated. Companies like Geron need independent validation of their work by academics, who in turn are funded by National Institutes of Health grants.

Today, these academics write grant applications for non-embryonic stem cell research, even though many of them don't believe their research will be useful. As Tom Okarma, CEO of Geron, says: "An enormous amount of scientific damage has been done. I assume whoever is elected will change the policy."

I don't assume anything, since President Clinton signed this ban into law. But I expect that the candidates will have to take a stand, and if it is Giuliani against Clinton, both will tend to lean towards reviewing or changing the policy.

In the meantime, Geron is spending millions of dollars of its own money on stem cell research, and announced in August that animal studies showed transplanted human embryonic stem cells improved heart function after a heart attack. Their showcase program is an embryonic stem cell drug to repair spinal cord damage for the 11,000 people a year that suffer these injuries—the same one that killed Superman. They need FDA approval to start a Phase I trial.

GERN is a buy up to $9 for a run to my $18 target after the next major news story.  (The stock closed below $7.50 Wednesday—Editor.)

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