Pharma and Biotech Will Follow the Rest of the Economic Downward Trend – a Defensive Play no Longer

October 14, 2008

Common wisdom has held for the last decade that no matter what the stock market does, pharmaceuticals and by extension biotech stocks always have solid, though not spectacular growth prospects. This leads me to the premise that pharma and biotech has been seen as a defensive play for a long time.

People may disagree with me on the notion that biotech stocks are a defensive play on the basis that the biotech industry, with the exception of Amgen, has not been generating a profit in the three decades since the cloning of human insulin, but that hasn’t carried over to biotech stocks, who have turned out to be a healthy investment (DJ Biotech Index is still up 36% on five years).

Coming back to the original argument of pharma and biotech being a defensive play, why would people have thought that in the first place? As the baby boomer generation approaches their collective retirement age—nominally beginning 2011—pharma and biotech will have their hands full catering to the needs of the affluent and worried retirees.

That simply does not hold true anymore today though, as a combined $2 trillion—or about 20% overall—of all retirement savings have been wiped out by the market collapse and subsequent credit freeze. The DJ Biotech index is down 15% on the one month period Sept. 8–Oct. 8, while the DJ Pharmaceuticals index is down about 13% for that same period.

Credit ratings have not taken a large hit so far, as virtually all players are saturated with cash. That cash will now, however, not be used to fuel the M&A machines that have been making headlines in the pharma world................

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