Owning individual biotechnology companies can be a challenging way to invest in the sector, as many of the current companies so not have enough money to stay in business past 2010. Also, any bad news regarding a company’s clinical trials can quickly put shareholders in the red, says Ron Rowland for Invest With An Edge.

Given those challenges, a biotech ETF can help spread the risk in the sector around some. It’s a challenge to pick one or two winning stocks within a sector, especially one such as biotech. While the industry was profitable in 2008, there is expected to be some consolidation. A recent Ernst & Young report revealed that 20% to 25% of firms have less than one year’s worth of capital left; others suspect this figure could be as high as 50%.

The sector has potential, though, and 27 different states are currently in a battle to entice biotech companies to their cities. And the recent repeal of the ban on federally funded stem cell research could lead to major innovations within the sector. Scientists are also scrambling to find a wheat plant resistant to the Ug99 fungus, which threatens to wipe out 80% of the world’s wheat crop.

As of now there are six biotech ETFs to choose from. They differ from each other by holdings and by weightings, so it is important for each investor to look under the hood of each ETF. Expense ratios may vary as well, as this also eats into returns, so consider these factors before going in.

• iShares Nasdaq Biotechnology Trust (IBB): down 3.5% year-to-date

Other biotechnology-focused ETFs include:

• HOLDRs Biotech (BBH): up 2.4% year-to-date
• SPDR S&P Biotech (XBI): down 10.9% year-to-date
• First Trust Amex Biotech Trust (FBT): up 0.9% year-to-date
• PowerShares Dynamic Biotech & Genome Portfolio (PBE): down 4.8% year-to-date
• PowerShares Global Biotech Portfolio (PBTQ): down 2.7% year-to-date

For more stories on biotechnology, visit our biotechnology category.

Ernst & Young posted their annual report, which stated that the recession could force companies to consolidate as sources of public funding are diminishing even though the industry was profitable in 2008, reports Rick Mullin for C&EN. The report shows that 20% to 25% of public biotech firms have less than a year’s worth of capital left. Others think the number has risen to as high as 50%.

Revenue of publicly traded biotech companies grew 12% to $90 billion in 2008, and the global industry’s net loss dropped to $1.4 from $3 billion. Capital raised dropped 46% to $16 billion for U.S. and European firms in 2008. IPO funding plummeted 95% to $116 million. Venture capital funding only fell 19% from 2007’s high of $6 billion.

Many companies will need to find new sources of capital, according to the Associated Press. They will need to either develop partnerships or seek buyouts from other companies. Lack of funding would eventually halt the long and expensive process of research and testing. In the U.S., the new administration has embraced biotechs and has pledged its support for the industry.

Soon, the market will see more personalized medicines and generic drugs that could increase competition, which should put a premium on biotechs that keep up with innovative breakthroughs. The continuing globalization of the sector is also seen as a sustainable way to finance further drug developments.

iShares Nasdaq Biotechnology (IBB): down 6.9% year-to-date

HOLDRS Biotech (BBH): down 1% year-to-date

Max Chen contributed to this article.

Small biotech companies are courting potential buyers, but not many are large enough to procure the necessary cash to buy them out, reports Kim Hart for The Washington Post. It is estimated that at least 100 small biotech firms are creeping into the red with only enough money to operate for a year.

It is often difficult to justify a large buyout to board members in a rough economy, but some large companies are taking advantage of the downturn to pick out start-ups with potential.

Health care costs are also expected to rise in 2009. This does not sound too pleasing to the consumers but it will help sustain the biotech market for new drugs and medical devices.

Harvard Professor John Holdren, an expert on global climate change, was approved by The Senate as President Barack Obama’s top adviser on science and technology policies, according to MSNBC. He will help implement Obama’s health care reforms and the possible lifting of restrictions on stem cell research.

Holdren is elated that the recent economic stimulus package supported biotech, nanotech, information tech, renewable energy and development of more efficient vehicles and buildings. Renewed interest in the biotech sector has pushed up its related ETFs in recent weeks:

• iShares Nasdaq Biotechnology (IBB): down 10.2% year-to-date; up 13.5% for the last two weeks; above its 50-day moving average
  

• HOLDRS Biotech (BBH): up 1.4% year-to-date; up 5.4% in the last two weeks; above both the 50-day and 200-day moving averages
  

Max Chen contributed to this article.

GE was cited for the poor performance of their finance unit, however, shares rose 11% as investors prepared for the worst. The Associated Press reports that S&P said on Thursday a sharp deterioration in world economies would lead to rising credit losses across GE’s finance portfolio.

As layoffs and cutbacks continue, the number of initial claims for jobless benefits rose last week, while the total number of people continuing to receive benefits set a record high. Christopher S. Rugaber for the Associated Press reports that the Labor Department reported that first-time requests for unemployment rose to 654,000 from the previous week’s upwardly revised figure of 645,000, topping analysts’ expectations.

The Commerce Department said retail sales fell by 0.1% in February, though that drop was much less than the 0.5% analysts expected.

• SPDR S&P Retail (XRT): down 2.3% year-to-date; up 3.2% over three months

Swiss pharmaceutical giant Roche agreed to pay $46.8 billion to buy 44% of Genentech (DNA). The $95-per-share deal brings Roche all of the sales of Genentech’s highly profitable cancer drugs as well as its promising research pipeline and scientific corporate culture, explains Alexander G. Higgens for the Associated Press.

Plenty of megadeals are taking place within the industry, as a push for cost savings and a rush to combine is dominating the biotech/drug market.

• Biotech HOLDRs (BBH): down 3.4% year-to-date; up 3.7% over one week; Genentech is 45.8%

U.S. District Judge Denny Chin denied bail for Bernie Madoff and ordered him to jail after he pleaded guilty to running a Ponzi scheme. As he was led off in handcuffs, the courtroom of victims applauded. Madoff earlier spoke softly but firmly to the judge as he pleaded guilty to 11 charges in his first public comments about his crimes, saying he was “deeply sorry and and ashamed,” report Larry Neumeister and Tom Hays for the Associated Press.

Will President Barack Obama’s decision to lift restrictions on stem cell research be beneficial to the biotechnology industry and its exchange traded funds (ETFs)?

This lift on research restrictions will once again allow researchers to use federal funds to work with new cell lines, however the regulations on creating new stem cell lines remains in place, state Julie Rovner and Jenny Gold for the Associated Press. Although there are many opponents to this type of research, it might be an answer to spark the U.S. economy and innovation.

The lift is estimated to strengthen New York’s economy by creating approximately 5,000 new jobs in science, research and medicine, states Michael Amon of News Day.  Additionally, there is a new research consortium at the University of Michigan which is planning on creating stem cells from about 400 embryos that have already been donated to the school, states Megha Satyanarayana of the Associated Press.  This will create more university jobs and could possibly lead to a medical phenomenon.

Some ETFs that may be affected by stem cell research are:

• HOLDRS Biotech (BBH): down 3.8% year to date

• SPDR S&P Biotech (XBI): down 18.2% year to date

• The reform will lower prices of drugs through Medicare and Medicaid which will eat away at profits.
• It will allow the re-importation of prescription drugs from outside the United States
• It will accelerate the approval of generic drugs and alter the tax code to limit the ability of U.S. companies to prevent overseas profits from taxation.

This is all really just hand-wringing, though, because the industry is gripped with uncertainty and fear, states Adam Fuerestein of the Street.

Of all the big money makers in the biotech industry, Amgen (AMGN) could potentially be affected by this reform by the tax implications. Currently, the biotech giant pays roughly 20% in taxes based on its heavily concentrated overseas business. Celgene (CELG), on the other hand, relies heavily on sales derived from Medicare patients, so the reform can take a bite out of their bottom line.

Genentech (DNA) could possibly suffer from the lower prices of Medicare drugs as well; after all 45% of the company’s revenue is derived from Medicare patients. The aforementioned are just a few of the many biotech companies that could potentially be affected by this reform.

On the other hand, some of Obama’s policies could wind up benefiting the biotechnology industry, including:

• The support of research and development and the idea of tax credits for research
• He supports embryonic stem cell research

From an index perspective, an ETF that could be influenced is Biotech HOLDRs (BBH), which was down 9% over the last week and 6.8% year-to-date; DNA is 45.7%.

A second ETF that may be influenced is the SPDR S&P Biotech (XBI), which was down 11.43% over the last week and 15.2% year to date; DNA is 4.7%, AMGN is 4.6%

TALF. Autos, education, credit cards may soon become available to consumers as the Term Asset-Backed Securities Loan Facility will finally be launched. Jeannine Aversa for the Associated Press reports that companies and investors that pledge eligible collateral to back the loan must request the new government loans by March 17. The Fed will provide the three-year loans on March 25.

Jeannine Aversa for the Associated Press also reports that Federal Reserve Chairman Ben Bernanke told Congress that the financial recovery must ultimately be led by the financial sector. The government must be able to prop up the unstable financial system in order for a turnaround to begin.

The effectiveness of a string of radical actions taken by the Fed, the Treasury Department and other agencies to stabilize markets “will be critical determinants of the timing and strength of the recovery,” said Bernanke to the Senate Budget Committee.

A New Low. Meanwhile, the number of pending home sales has fallen to 7.7%, a new low set in January. The National Association of Realtors seasonally adjusted index of pending sales contracts fell 7.7% to 80.4 in January from a downwardly revised December reading of 87.1.

Economic hardships such as job loss, instability and falling home values are turning potential buyers away from the housing market. Pending sales were down in every region but the West, where soaring foreclosures have made prices especially attractive for buyers.

Takeover Bid. In an aggressive attempt to defend the company, Genentech claimed that the $42 billion bid from Roche greatly undervalued the biotechnology company and would undermine the innovative culture. Three independent Genentech directors advised shareholders to reject Roche’s latest proposal to buy the 44% of the company it does not own at $86.50 a share, after rejection of its $89 bid last summer.

Andrew Jack and Jennifer Macintosh for The Financial Times report that the offer conditions give Roche the option to cancel or amend its offer, which is scheduled to expire on March 12, on a number of grounds including if any one of four indexes – including the Nasdaq or S&P 500 – lose more than 15% from Feb. 6. By yesterdays’ close, the S&P 500 had lost 19%.

• Biotech HOLDRs (BBH): down 8.3% year-to-date; up 0.6% for three months; Genentech is 41.9% of assets

What’s in the bill?

• A provision to help workers who lose their jobs pay for the health care they were receving
• A provision to make health care records available electronically
• $19 billion in grants and incentives to purchase health information technology

Some believe that a little boost was given to the industry as a result of the exit of Tom Daschle as the health and human services secretary nominee and in hopes of a new candidate committed to less stringent government control over the industry, states Richard Widows of TheStreet.com.

This doesn’t mean that all the indexes in the industry have been flourishing.  If you decide to play the industry, do your homework and remember to watch the trends.  Here are three ETFs that are near their 50-day moving averages.

• Health Care Select SPDR (XLV): down 1.4% year-to-date

• HOLDRs Biotech (BBH): up 0.4% year-to-date

• PowerShares Dynamic Biotech & Genome (PBE): up 2.8% year-to-date

On Wednesday, biotech executives plans to visit Washington to plea for a change in tax laws enabling losing companies to borrow from the government now in exchange for forfeiting potential research and development tax credits once they become profitable, states Andrew Pollack of the New York Times.

The problem with this is that the vast majority of biotech companies never become profitable, so, in essence, they are asking for a loan that will most likely default. In fact, the chief executive officer of Genentech (DNA) suggests that the industry as a whole has lost about $100 billion since its inception in the 1970s.

The predicament at hand is that of the 370 publicly traded American biotech companies, an astonishing 125 only have enough cash on hand to last them about six months – without help, this will be devastating to the nation’s unemployment rate.

So what makes them different from the automotive or financial industries?  They state that it is their drive for innovation, American competitiveness, and the desire to keep the United States ahead of the “game.”  If this keeps up, pretty soon, the federal government will have a little bit of every sector on its balance sheet.

Biotech ETFs that could get a spark if the government decides to change the tax laws are:

iShares Nasdaq Biotechnology (IBB): down 18% year-to-date

SPDR S&P Biotech (XBI): down 14.7% year-to-date.

Biotech HOLDRs (BBH): up 1.4% year-to-date.

Billy Fisher for TheStreet points out that while the S&P 500 has lost 35% year-to-date, biotech funds have had stand-out performances even though resistance has been a factor.

Biotech HOLDRs (BBH) has done especially well, as it is the only biotech ETF in positive territory year-to-date, up 5.1%.

The performance is on the radar of money managers and investors alike, but take note that biotech is not completely in the clear yet. Venture capital will become more discerning and wherever it invests this money, larger ownership interests are going to be desirable.

Beware, though: BBH is a concentrated fund, with only 12 holdings. The top three holdings are making up about 80% of the ETF, so the approach is focused, and it is not the most cost-efficient fund around. The top holdings are Genetech (DNA), Affymetrix (AFFX), and Gilead Sciences (GILD).

A more diversified biotech ETF is the SPDR S&P Biotech (XBI), which is down 9.7% year-to-date. There are 22 holdings, with most weighted between 4%-5% of the fund.