iShares NASDAQ Biotechnology Index (ETF) (IBB)

With health care progressing towards personalized medicines, modular diagnosis and such advanced areas, its is only natural to assume that biotech companies will be making the hay while the sun shines. Contrary to expectations the year 2006 brought in mixed results for biotech firms with returns swinging wildly in either direction.

The ishare Nasdaq Biotechnology index fund (IBB) maintains a diverse portfolio of about 169 biotech companies, all of which are listed in the Nasdaq stock exchange and the fund tracks the Nasdaq biotechnology index. Of all the companies in the fund except Amgen, which contribute 14% of the total asset share, none of constituents contribute more than 5% of asset share. Also among all other biotechnology funds, IBB charges the least in terms of management fee with 0.48% against an average of 1.5%.

The composition of the fund is made up of small cap firms whose fortunes are invariable tied to the success/ failure of a few marketable products that are not yet available. The year 2006 was not too good as Amgen; the fund’s main constituent dropped by 11% thus bringing down the fund’s annual return for the year ended December 31 2006 to 0.57%. The year 2007 is expected to see a spate of new product launches which should prop up the industry.

Thus a firm with product launches in 2007 ought to have a good year, however there is one catch. Biotech firms hoping to make the cut will have to find justifications for the complexity involved to educate their patients, to spend exorbitant amount of money for a seemingly small patient population, and high expense of a biotech drug compared to a traditional medicine. Only firms will a sound business model and deep pockets will be able to survive the initial onslaught and rake in revenues even if they manage to bring in new drugs to market. Most of the firm’s in the fund IBB does not fall into this category and thus will not be able to capitalize on the emerging opportunity in Biotech sector.