For the past few years, Wall Street has beaten down one of the most lucrative industries in the whole lot of them…biotechs.

Biotechs offer investors with opportunities to get in on breakthrough technologies, while they are still in the lab. Many times, they also offer average people with a way to invest in future cures and solutions to the world’s most dangerous diseases. That’s quite a one-two punch.

So why have investors stopped investing in these ground-floor companies?

As the leader of the free world said, “There’s no question about it. Wall Street got drunk…it got drunk and now it’s got a hangover.”

That’s really the only way to describe what has happened the past few years. If you have ever had a bit too many to drink in your life, you know that you sometimes get a little too focused on certain things, and forget about other things completely. That’s what Wall Street did with the biotech industry…

You see, investors have been too busy buying up investment banks and mortgage fiascos. Now that the dust is starting to settle (even though we expect that to take quite a while), more and more interest is being paid to technologies and biotechs. That hasn’t happened on any large scale since the tech bubble burst.

A few weeks ago, Big Pharma went head first into this recent breakout, when Switzerland-based Roche Holdings offered to buy up the other 44% of Genetech Inc. that it didn’t own. The news of this possible deal sent shares flying 15% overnight.

Just a few days ago, Bristol-Myers Squibb offered to buy ImClone Systems — a small $5 billion biotech — for $60 per share. While that one was instantly rejected it did send ImClone shares flying, giving investors a nice, one-day 40% gain.

These stories are starting to roll in now. There’s a perfectly reasonable explanation for it…

Big Pharma is struggling to keep up with shareholder demands of larger profits, while they are fighting generics and more competition. To combat falling margins, these mega companies are buying up biotechs that have a few promising products in their pipelines. These new products are the future of the industry, and Big Pharma knows it.

All these deals are also bringing new interest to the industry. Investors, who have previously forgotten about the pharmaceutical industry, are just now starting to jump back in. Over the past few weeks, biotechs have outperformed the rest of the market in a big way. This is only the start. Smart money says we have a long way to go from here:

But, if you want to try and call the bottom of the financials flop, or the mortgage bankers’ bankruptcy, be my guest. We’ll be busy looking for the best biotech to own as the industry starts its march north.

Sincerely,
Jim Nelson
August 6, 2008

Biotech Rally Just Beginning was originally featured in the Penny Sleuth.