A Prescription for Profits

By Michael Shulman

I typically write about small, unknown or misunderstood biotech and life sciences products and companies. And this is a category of investments that appears to have been whacked harder than most in the current bear market.

I just completed a half-year performance analysis of my ChangeWave Biotech Investor portfolio. I want to share it with you to illustrate what investors are doing based on the performance of the 34 companies I've had "open" since the market peak in October 2007.

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With the market in bear territory -- down 20% from its previous October high -- the two major biotech indices have outperformed the general indices. The Amex Biotechnology Index (BTK) is down 11.2%, and the Nasdaq Biotechnology Index (NBI) is down 9.7%. Looking at their blended performance -- down 10% -- they are outperforming the market by about 10 points.

The average recommendation in my ChangeWave Biotech Investor service -- which contains a different mix of stocks than those included in these measures, as well as some device and diagnostic companies -- is down 4.19% since the beginning of the slide to bear market territory.

That said, here's my half-year performance analysis:

Mature Companies

The average "mature" company I recommended, i.e., companies with profits and positive cashflow, was up 35%.

This sort of an anomaly is due to the 425% rise in one microcap -- Questcor Pharmaceuticals (QCOR) -- that wasn't added to our stock list until March 2008. And even excluding QCOR, this group of mature stocks was still up, on average, more than 6%. All of these companies also enjoy at least double-digit growth in revenues.

The big-cap Pharmaceutical HOLDRs Trust (PPH), the index representing Big Pharma, was down 15.5% since October, meaning it's not just size and profits that matter, but growth as well.

Emerging Companies

The average "emerging company" was hurt the most during this period. These are companies in late-stage trials or ones that are generating revenues (at times considerable revenues), but are still losing money and have negative cashflow. These outfits were down, on average, a whopping 53%.

Speculative Companies

Speculative companies -- those with revenues that may be a few years out and many regulatory hurdles -- were down 43%.

Bleeding Edge Companies

What I call "bleeding edge" outfits -- companies that are many years away from revenues with unproven science, not to mention regulatory hurdles -- were down 11%.

To sum it up, biotech and life sciences is a bipolar market at the moment.

The big guys, such as Gilead (GILD) or Biogen Idec (BIIB), are moving up, the guys in the middle are getting creamed, and the "hope-and-dream" companies are holding their own, given the steepness of the falloff in this market. Like I said before, the PPH index representing Big Pharma is down 15.5%, and I see this trend continuing. High-growth, cashflow-positive, profitable companies will survive, and in many cases outperform, this bear market.

Michael Shulman is Editor of ChangeWave Biotech Investor.