Large-cap biotechs preferred as all indexes rise in July, Merrill report says

By Jennifer Chiou

New York, Aug.2 - All of the Merrill Lynch Biotech indexes were up in July, but it appears investors favored large-cap biotechs, Merrill Lynch biotechnology research analysts Eric J. Ende, Thomas J. McGahren and Rita Vitielle said in a July report.

During July, the Merrill Lynch Small-Cap Biotech Index increased 11.3%, the Merrill Lynch Mid-Cap Biotech Index rose 6.0% and the Merrill Lynch Large-Cap Biotech Index was up 18.1%, suggesting that investors favored large caps, possibly based on strong earnings, Merrill said.

The analysts said they divided biotechnology stocks into two categories with respect to business strategy - therapeutic companies that develop drugs and tool companies that develop technologies - accounting for the Merrill Lynch Therapeutic Index and Genomics/Tools Index.

The Merrill Lynch Therapeutic index increased 16.5% and the Merrill Lynch Genomics/Tools Index was up 7.0% in July, suggesting a focus on product-based biotechs, Ende, McGahren and Vitielle said.

During July, the Amex, S&P 500 and Nasdaq Composite biotech indexes increased by 10.1%, 3.6% and 6.2%, respectively, Merrill said.

The current four-week moving average mutual funds flow is $13 million, including negative $260 million for the week ended July 27, compared to June's moving average of $68 million, Merrill said.

For the year, flows into health care/biotech funds are $1.9 billion. In 2004, flows were $1.0 billion and in 2003, negative $1.0 billion, the analysts said.

During July, $421 million of new supply - initial public offerings and other priced deals - came into the market as compared to June when there was $463 million of new supply. In 2005 to date, $4.3 billion of new supply has come into the market versus $10.8 billion in 2004 and $12.7 billion in2003.

Total supply in the pipeline is about $8.1 billion versus last month's pipeline supply of $8.0 billion, Merrill noted, adding currently there are 11 initial public offerings filed representing $1.1 billion of new supply.

Of the biotech companies Merrill tracks in its indexes, Sirna Therapeutics Inc. recorded the best return of 142.9% for July, while Argonaut Tech Inc. recorded the worst at negative 72.9%, the analysts added.

Thus far in 2005, Northwest Biotherapeutics has posted the highest return of 271.8% and Curon Medical Inc. has had the poorest return of negative 77.1%, they said.

Amylin Pharmaceuticals Inc. has the highest short interest at 26 million shares, Merrill said.

The analysts noted 61% of biotech companies have less than two years of cash and 30% have less than one year of cash.

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