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BTK – A Decade of Change

February 2, 2010
Do you ever wonder what is really behind the often quoted BTK index (“NYSE Arca Biotechnology Index”)? Especially if it is the index you compare your own company’s stock with on a long term chart? If you compare your favorite biotech with the BTK over a 10 year period, here is what you are up against: CHANGE.

When the last decade started, in the peak of the genomics bubble, the BTK was made up of only 15 stocks. Only 6 of those remain in the index today and today the index is made up of 20 stocks. So, you have 30% of the index today representing the components of 2000.

Looking at the first table below it is easy to see that acquisitions are responsible for most of the change in the decade. Note that acquisition premiums drive the equal-weight index up prior to index rebalancing and additions, possibly leaving your comp looking as if it is underperforming. Such an impact is much smaller on broad indices that hold 100+ stocks, like the Nasdaq Biotech Index (NBI). With the BTK, each stock starts out each quarter with a 5% weighting!

And where is Genentech (DNA) in the 2000 list? Imclone (IMCL)? Icos (ICOS)? All of these were added after Jan 2000 and were subsequently taken out prior to 2010 due to Big Pharma acquisitions. Again more change with lofty premiums. The Genentech puzzle is solved when you recall that Roche acquired Genentech back in 1999 and months later spun out a large portion of the shares back to the public. Then, in 2009, Roche took these shares back. Thus DNA was zigzagging in and out of the index.

And don't forget that the "picks and shovels" were added to the index, so unlike 2000, it is no longer a "therapeutics only" index. During the decade, the tools companies rose to 30% of the index with the additions of Celera, Affymetrix, Illumina, Invitrogen, Millipore, and Sequenom.