Investors tend to focus on stock prices to measure the health of companies and the market in general. But volume also is important because of its effect on the ability of investors to get in and out of stocks.

One of the most notable changes in the biotech group in recent years is its transformation from a thinly traded sector with limited liquidity into one with volumes high enough to enable larger investors to trade in the group. Going into 2001, a key issue is whether the weakening both in NASDAQ as a whole and biotech specifically could create a liquidity crunch that could drive non-core buyers from the space.

While there is consensus that the overall market will continue to cool, biotech market watchers don't expect that a downturn - even a protracted one - would send the industry back to the minuscule trading volumes of the early 1990s. Bankers argue that biotech is sufficiently well funded to weather the storm, and that continued fundamental progress will drive investors to the sector. Additionally, they expect that biotech will garner more attention as it remains one of the last growth sectors standing after the demise of the dot.coms and slowing growth in areas such as telecommunications.

"In the '90s the economy was driven by the PC, wireless and the internet, and this decade will be driven by genomics, intelligent drug discovery, personalized medicine and molecular biology. Investors are beginning to realize that," said Robertson Stephens banker Mark Simon.

Simon believes biotech has won back some of the investors it lost through the 1990s, when valuations were ahead of fundamentals. "In '91, the industry was up 110 percent and stocks were ahead of themselves. Those investors that got out of the sector back then started to come back to the sector in late '99 because the fundamentals had played catch-up," he said.

Indeed, J.P. Morgan banker Deepa Pakianathan sees more investors moving into biotech as the sector becomes - ironically - more of a "safe haven" within NASDAQ. "I don't know what the environment will be six months from now, but if the NASDAQ continues to fall, biotech could remain a safe haven," she said.

Pakianathan argued that the industry will continue to attract non-core buyers if it can continue to generate product approvals and "deliver on the earnings growth that's been promised by big cap biotech, with continued growth in brand name biotech products like Rituxan, Herceptin and Remicade."

Simon estimated that 350 biotech compounds are in Phase III trials, presaging a flood of products hitting the market. "Even if we get 15 percent of those to the market, you can envision 50-plus biotech drugs approved in the next two years," he said (see "Looking for News Flow", A6).

In addition, the impact of a renewed focus on product news, as well as a broad market demand for earnings quality, leaves open the question about investor enthusiasm for platform plays after the genomics craze of 2000.

On top again

The relative attractiveness of biotech was evident in its 2000 performance relative to the other market indices, as only the BioCentury 100 and the BioCentury London Index posted gains on the year, joined by the Amex Pharma Index. Indeed, the BioCentury 100 topped the broad market indicators for the second successive year (see BioCentury, Jan. 4, 2000).