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Stock Strategist

Betting on Biotech: The Mispriced and Fiscally Fit

These biotechs have the potential to provide a safe haven from market chaos.

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When AtheroGenics (AGIX) declared bankruptcy earlier this month--an event that Morningstar analyst Bill Buhr saw coming  last November--investors were reminded that the business of developing new drugs is fraught with uncertainty. According to the Tufts Center for the Study of Drug Development analysis, it costs $1.2 billion to bring a biologic drug to the market--factoring in the cost of failures along the way and the time value of the money poured into R&D. Management teams are often forced to make a big bet on the future of a single drug candidate, and if trials don't go as planned, the firm's investment in research and development becomes virtually worthless. These costs are looking even more onerous for some cash-strapped biotechs today, with liquidity proving difficult to come by and uncertainty riding high in the broader stock market.

Biotechs: Tough Under Pressure
Until recently, biotechs as a group had been holding their own in the broader market storm. The Amex Biotechnology Index, or BTK, was roughly flat for the year through Sept. 30, a remarkable achievement considering the challenges that most corners of the market have seen over the past few months--challenges that brought the S&P 500 Index down about 19% through this same period. However, for the first nine days of October, fear appeared to be more equally distributed, with the BTK down 18% for the S&P 500's 22% drop.

Karen Andersen does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.