Biotech proves defensive against tough 2008 market

Sharp gains in shares of biotechnology heavyweights mitigated the wider sector's decline in 2008. Biotech stocks proved to be one of the safest investments this year, as strong drug sales and the potential for large buyout deals defended the sector from broader market collapse.

Biotech products are usually considered lifesaving necessities by patients, and thus not likely to get cut out of a budget because of a weak economy. Furthermore, with no development path paved yet for generic biologics, biotech companies don't face the same competition as their big pharma cousins.

Many of the largest players, including Genentech Inc. and Amgen Inc., ended 2008 up about 23 percent and 24 percent respectively. Vertex Pharmaceuticals Inc. climbed 31 percent, Celgene Corp. 18 percent and HIV drug maker Gilead Sciences Inc. 12 percent. The substantial gains by many large biotechs offset a 16 percent loss by Biogen Idec Inc., a 65 percent loss seen in PDL BioPharma Inc. shares and Amylin Pharmaceuticals Inc.'s 72 percent drop.

The American Stock Exchange's biotechnology index, which includes several bellwether stocks, fell about 22 percent during the year. The broader Dow Jones U.S. biotechnology index shows a gain of 3 percent for the year.

The sector far outperformed the Dow Jones Total Market Index, which is off 40 percent for the year, and the Standard & Poor's 500 index which is down 39 percent.

One industry-wide theme in 2008 was buyout activity. In large part, it helped reverse the previous year's downward slide.

Large pharmaceutical companies continued to shop for big and small biotechs in order to flesh out lagging pipelines of new drugs and grow revenue streams. Biotech companies, whose products generally are made from living cells, also offer some protection against generic competition because currently there is no legal pathway for approval of copies of biotech drugs.

In 2008, Japan's Takeda Pharmaceuticals bought Millennium Pharmaceuticals for $8.8 billion, Eli Lilly & Co. bought ImClone Systems Inc. for $6.5 billion, and analysts expect Roche to eventually buy Genentech Inc., despite having its $43.7 billion offer rejected as too low.

"The need among pharmaceutical companies to acquire smaller companies to fulfill their pipelines, that is not going away," S&P equity research analyst Steven Silver said in a recent interview.

Much of Thousand Oaks, Calif.-based Amgen's rise came from expectations over its future sales potential with the osteoporosis drug denosumab. In June, the company gave investors a sneak peak at study results showing the drug reduced the rate of spinal fractures in postmenopausal women. The company has already asked for FDA approval and analysts have placed denosumab's sales potential at $2 billion annually.

Meanwhile, South San Francisco, Calif.-based Genentech gained on strong sales and continued potential for its key blockbuster cancer drug Avastin. Shares rose following Roche's bid but have since receded to below that $89-per-share offer.

Not all was rosy, however, as safety concerns plagued some in the sector.

Amylin's shares plunged due to questions about the safety of diabetes drug Byetta and the company's next-generation treatment, exenatide LAR. Meanwhile, safety issues of multiple sclerosis drug Tysabri drove shares of Biogen Idec and partner Elan down sharply as well.