Despite haphazard price swings and your lack of a doctorate in genetic engineering, several irrefutable facts support including biotech stocks in your portfolio.
First, unlike firms in the Internet sector, research and development at biotechnology companies is backed by a wad of cash. Second, while electronic-tech companies continue to deliver disappointing earnings news, the prospects for the biotech industry remain bright.
Third, the pace at which drugs are coming to market is accelerating, compressing the time when these companies will achieve significant earnings. About 350 genetic drugs and vaccines could gain regulatory clearance in the next two years, and the government has already approved blockbuster genetic drugs, such as Immunex's Enbrel, to treat rheumatoid arthritis, and Idec's Rituxan, to treat non-Hodgkin's lymphoma.
In sum, big things are going to happen.
Still, investors remain skittish. Since March of last year, biotech stocks have staged seven retreats, including two severe corrections, which dropped the NASDAQ biotech index 42 percent and the American Stock Exchange index 37 percent from their early-2000 highs. A modest rebound in early 2001 also fizzled.
Last year's volatility was due in part to investor flight from any group of stocks that appeared to be overvalued. But in their panic, investors ignored the distinction between selling cat litter online and working to ease the pain of arthritis or regenerate bones eaten away by osteoporosis.
So why should you be confident that the buyers will take control? Because genetic drugs offer a new way to treat disease.
This new way involves developing drugs from naturally occurring human substances by finding out what genes or proteins cause health problems and targeting them through methods such as gene therapy — the process of introducing healthy genes to block or replace damaged ones.
When the dust clears, savvy people will begin buying back the worthwhile stocks. And you should, too, especially while their prices remain relatively low.
At January's J.P. Morgan Chase/H&Q conference, where 5,000 health-care experts gather yearly, the consensus was that 2001 should be a good, though not huge, year for biotech stocks. By 2002 the market outlook should turn extremely, and perhaps profoundly, favorable.
Just be aware that biotechnology doesn't track the economy at large. Biotech stocks are stakes in intellectual property: patents, research partnerships and clinical-trial results. It's probably the hardest industry in which to make good judgments about a company's worth.
Next week we will name names in the sector.