In the biotechnology arena, the Nasdaq Stock Market is taking
on the American Stock Exchange, and, if you own some of these
stocks, you might soon end up the winner.
On Monday, Nasdaq announced substantial
changes in the components of its up-to-now mostly ignored Nasdaq
Biotechnology index {IXBT}.
The changes are designed to reconstitute Nasdaq's branded biotech
index so that it will better compete with the Amex's already
well-entrenched biotech index {.btk}.
Many large mutual funds give considerable
weight to the Amex index as a screening tool, which they use
to build a diversified portfolio of biotech stocks that they
sell as a package to retail investors. Nasdaq's newly honed
biotech index will also be tradable beginning on Feb. 2 when
a new Barclays Global Investors exchange traded fund, called
the iShares Nasdaq Biotechnology Index fund, debuts.
In addition, Nasdaq officials promise
that there will be a variety of other new financial products
based on its new biotech index rolled out before too long.
"I think it's positive news for
biotechs and particularly for the stocks on the new list,"
says Jim McCamant, the veteran biotech stock picker who publishes
the Medical Technology Stock Letter, based in Berkeley,
Calif.
The changes pared Nasdaq's old index
down from 202 companies to 76, the result of new inclusion criteria
that eliminated the smaller-cap biotech stocks usually shunned
by most institutional investors.
Luminex Corp. {LMNX}
is the only firm that was added to Nasdaq's list that didn't
appear on its previous index.
"We believe this revision may introduce
volatility, as investors who weight their portfolios on the
basis of the index move to realign their holdings," says
Andrew Milne, an analyst at Dain Rauscher Wessels in Minneapolis.
Like Milne, most observers who track
the sector agree that the new index will have an impact that
could grow over time, depending on the popularity of the new
investment vehicles on which it is based.
But that is where the agreement ends.
Milne thinks the advantage will go to
the companies on the list that have the strongest balance sheets.
His favorite picks moving into the index change are Abgenix
Inc. {ABGX
},
IDEC Pharmaceuticals Corp. {IDPH}
and Medarex Inc. {MEDX},
all three of which are on both the Amex and Nasdaq lists.
Milne has "buy" ratings on
Abgenix and IDEC, and a "strong buy" rating on Medarex,
with 12-month price targets of 60, 85, and 75, respectively.
Abgenix and Medarex are losing money.
But Milne points out that Abgenix has about $750 million in
cash on hand, while Medarex still has about $360 million in
the bank.
"Abgenix is in the position where
they can almost fund their operating expenses out of interest
income," Milne says. "The cash puts Abgenix and Medarex
in a very strong position."
Meanwhile, now-profitable IDEC is benefiting
from its lucrative drug-development partnership with Genentech
Inc. {DNA}
that led to the creation of Rituxin, a successful new compound
that treats a form of non-Hodgkin's lymphoma.
McCamant, on the other hand, thinks the
clear advantage in the months immediately ahead will go to ImClone
Systems Inc. {IMCL
},
a stock he has been pounding the table on for months.
McCamant says ImClone Systems is nearing
regulatory approval to start selling a new anti-cancer drug,
presently called C225, sometime later this year.
"I'd be favoring the drug-development
companies that are bringing important new products to market
this year," McCamant says. "The market potential for
ImClone's new drug is five times larger than Rituxin, and you
saw what Rituxin did for IDEC."
McCamant says Abgenix and Medarex could
also be good buys right now, given their rather sharp declines
from their all-time highs. But he is worried that IDEC's stock
may still be ahead of itself.
"Abgenix and Medarex have come down
enough so they could be fairly attractive short-term buys,"
McCamant says. "But I'd stay away from IDEC, which is now
significantly overvalued, in my opinion."
Luminex is another stock that could get
a lift when the new index-based fund starts trading next week.
The company sells a new type of testing technology that greatly
accelerates the drug-discovery process.
"Luminex was already one of my best
picks for the year, so this is very good news," says Anna
Kazanchyan, an analyst at First Union Securities Inc. in New
York.
Kazanchyan has a "buy" rating,
her firm's highest recommendation, on Luminex's stock, along
with a $50 12-month price target.
"Luminex is one of the few genomics
companies to anticipate profits in 2002," Kazanchyan says.
"They have $77 million in the bank and are only burning
about $10 million a year. They have a high likelihood of becoming
a standard testing technology. Being on the new list will bring
the company to the attention of more investors."
One consequence of the new index, however,
is the slighting of many smaller, less-well-known but still-promising
biotech firms. Nasdaq's new list excludes, for example, any
stock priced under 10 a share as well as stocks that have an
average daily trading volume of less than 100,000 shares.
"The smaller-cap stocks are where
you often see the most risk but also sometimes the best rewards,"
notes Alfred Mansour, Ph.D., the founder of BiotechWatch.com.
BiotechWatch.com tracks the progress
of large and small biotech firms, including staying current
on the drug-development efforts that might one day land at least
some of the smaller firms on the major biotech stock indexes.
"We [saw] a flight to quality after
what happened to the Internet stocks, and the new biotech index
is along those same lines," Mansour says. "But there
are some very interesting things going on in the smaller-cap
biotech stocks, too, so they're worth looking at."
Even without the new index, McCamant
says that the biotech sector is worthy of attention right now,
given how steeply many of the leading stocks sold off late last
year. There had been some worries, going into the early part
of this year, of even more selling over the short term, in conjunction
with the expiration of lock-up periods on the more than a dozen
biotech firms that went public during the second half of 2000.
But those fears have largely abated,
McCamant says, given the recent decline in many of those stocks
to near or even below their original offering prices.
"The stocks went down further at
the end of the year than many had anticipated," McCamant
says. "But the new index should help because one of the
problems was always 'how do you invest in biotech?' This is
going to make that a little easier to figure out and probably
will attract more money into biotech."
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