3Q Financial Preview: Macro trumps micro

Biotech, along with the rest of the stock market, has been trading in a range for the last 18 months. That's likely to stretch to 21 months this quarter, as Wall Street watchers say conditions are not ripe for a breakout. They do not see a significant inflow of funds, are generally neutral at best on other market indicators, and think that momentum investors are still on the sidelines.

The problem for bio-tech is that the sector tends to do well when investors feel richer and are more willing to put money into biotech and other speculative investments. Thus, until more profits are created in the broader markets, biotech is likely to tread water.

"Biotech won't become a darling without a better macro environment - it won't happen in a vacuum," said Pacific Growth banker George Milstein. "People need to stop losing money, and it's still a choppy trading environment."

The situation is mirrored in Europe, where it also may take time for pension funds to move back into high growth companies. "European funds are still fully bought into the cult of safety in bonds and cash," noted Anais Faraj, a global strategist at Nomura International.

Mutual respect

After bottoming out in March 2003, the markets enjoyed nine months of solid upward moves (see "Index Moves").In that time, biotech was the big winner, as the BioCentury 100 Index advanced 48%. Close behind was NASDAQ's 46% gain, followed by a 28% updraft in the DJIA.

But since the start of 2004, biotech and the broader markets have been flat. Biotech has shown no gain, while NASDAQ and DJIA have eked out gains of only 4% and 2%, respectively, over 18 months. There's little reason to think that the rest of the year will be different.

Key indicators of the market's direction include interest rates and the flow of funds into or out of mutual funds. Most macro watchers polled by BioCentury are not bullish on either.

"The leading economic indicators are somewhat weak, and that generally drives the market," said Max Jacobs, an analyst at Mehta Partners. "I've learned that probably 80% of biotech performance is fund flows."

At the end of May, total

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