Ride the Biotech Boom

This article is published with permission from InvestmentU.com.

If you missed the fireworks on July 4, don’t worry — there have been plenty of fireworks in the past two weeks in the biotech sector.

Since June 24, the Amex Biotech Index (NYSE: BTK) is up over 11%. That’s a solid year for most indexes. Year to date, the group is up over 34%.

Typically, biotech stocks, particularly those that deal with cancer, run up in the spring, ahead of the annual meeting of the American Society of Clinical Oncology (ASCO). At this meeting, nearly every major (and minor) player in the fight against cancer presents data from various clinical and preclinical trials.

After the ASCO meeting, which takes place the first week of June, biotech stocks usually take a breather, sometimes for the rest of the year until they start moving in anticipation of the J.P. Morgan Healthcare Conference — the first big one of the year — in early January.

Acquisition fever fuels run-up

This year, biotech hit a high in mid-May and then backed off. But in late June the sector ignited. Fueling the fire was the proposed acquisition of Onyx Pharmaceuticals (Nasdaq: ONXX) by Amgen (Nasdaq: AMGN) for a 38% premium.

Onyx’s management rejected the proposal and put itself up for sale. The stock opened 53% higher and has climbed a few points since.

Other cancer stocks have also soared. ImmunoGen (Nasdaq: IMGN) is up 20% in the past few weeks. And Celldex Therapeutics (Nasdaq: CLDX), which has drugs in development for brain cancer and breast cancer, has spiked 63% in just two weeks. There have been plenty of other biotech stocks that have been moving up as well: Alnylam (Nasdaq: ALNY), and Immunomedics (Nasdaq: IMMU) to name just a few.

Can the run-up continue? I believe it can.

Right now there is a lot of excitement over a possible acquisition of Onyx. If the company does in fact get bought at a decent premium, that’s going to make takeover speculation go into overdrive.

Plus, big pharmaceutical companies desperately need new drugs. And biotech can provide them. Smaller companies like Celldex Therapeutics can be bought at a much lower price than a larger company like Onyx. There are many small-cap biotechs with promising drugs that would not be an expensive purchase for a large pharma company like Merck (NYSE: MRK) or Bristol-Myers Squibb (NYSE: BMY).

Additionally, the technicals look strong:

The index recently broke out of a flag pattern. A flag is a short-term move that goes against the prevailing trend. You can see that the biotech index has been moving up since November, but in May and June the index took a break from its ascent. Now it has broken out above that flag pattern.

Flags are fairly reliable technical patterns. This one suggests that the index can still go meaningfully higher. I wouldn’t be surprised to see it hit 2,300 before the move is over.

How to play it

If you agree, there are several ways to play this move. You can buy a biotech ETF like iShares Nasdaq Biotechnology (Nasdaq: IBB) or you can find some biotech stocks with promising drugs that have shown efficacy and (very important) a strong safety profile in clinical trials.

Whichever way you go, consider putting some of your speculative money to work in this sector, as there should be more spectacular gains on the way.

Marc Lichtenfeld is a senior analyst at Investment U. See more articles by Marc here.

The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.