Companies to Watch in Biotech Bull Market

Biotechnology stocks rallied up 7% this past month, somehow eluding the pervasive euro-gloom and outperforming the PowerShares QQQ (Nasdaq: QQQ), which is up about 3% year to date. The bellwether biotechnology ETF, the iShares Nasdaq Biotech Index Fund (Nasdaq: IBB), is up 10.78% YTD and 5% since Nov. 23.

Before a deep dive in midsummer, resulting from the global market meltdown, life science stocks were actually up 17%. Since then, despite a storm of negative market forecasts from economists and strategists, biopharmaceutical stocks have not only stabilized but recovered.

In fact, they have decoupled from news of the global debt glut because of their predictable earnings and the perception that drugs are a defensive sector. Although biotechnology stock performance is closely correlated with the Nasdaq market, there are several trends that make biotechnology investing a good diversification move for a balanced equity portfolio.

The life sciences are developing rapidly because of better understanding of the molecular basis of disease and numerous strong trends that will continue through 2012: personalized medicine, targeted therapies, immunotherapy, technology convergence, and better clinical diagnostics including companion diagnostics. (See Biotech Bull Market Intact, Despite Funding Gap.)

Despite limited equity funding for early-stage companies, large- and mid-cap biotech firms are financially stronger. In addition, there are more than 50 smaller-cap companies that are important trading vehicles with exciting technological developments, products, and services in the news.

Biopharmaceuticals are one of the strongest market sectors because costs are being cut, product revenue is growing, clinical studies show progress, and the M&A model remains intact. Large-cap drug companies are financially strong because of cost cutting in both administration and research and development, and increasing reliance on biotech deals to build their product portfolios.

Major drug companies such as Bristol-Myers (NYSE: BMY) and Pfizer (NYSE: PFE) have been aggressive in biotech. These firms have reengineered their business models, so the market has boosted their stocks with big returns of more than 20% YTD. Moreover, large-cap drug and biotech stocks have a defensive quality in a volatile market, especially if they pay a dividend. Amgen (Nasdaq: AMGN) is a case in point: The stock is up 15% in the past three months, culminating in a successful tender offer that raised $5 billion at $60 a share.

Disclosure: The author is a trader and investor in many biotechnology companies. Current holdings include Albany Molecular (Nasdaq: AMRI), Bristol-Myers Squibb (NYSE: BMY), Cubist Pharmaceuticals (Nasdaq: CBST), Dendreon (Nasdaq: DNDN), Fidelity Select Biotech (FBIOX), Gilead (Nasdaq: GILD), Idexx (Nasdaq: IDXX), Illumina (Nasdaq: ILMN), Pfizer (NYSE: PFE), and SeraCare (Nasdaq: SRLS).