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'09 Sector To Watch: Biotech

Investors are keeping a close eye on biotech stocks right now. Not only did the sector perform reasonably well last year, but there seems to be a flurry of positive news that could lift shares higher.

Merger Speculation

According to JP Morgan, biotech is one of the few bright spots in an otherwise bleak market.

They say “fundamentals look intact for the large cap biotech group with an upward bias on Street estimates.” In other words, JP Morgan is bullish on the sector for 2009.

And in his blog Behind the Money, Fast Money Sr. Producer John Melloy noted this past weekend the Wall Street Journal made a strong argument to get long.

The paper said cash-rich big pharma may go shopping for biotechs that have late-stage drugs, in order to cover for their blockbusters coming off patent, such as Pfizer's Lipitor. Amylin is a possible target mentioned by the paper.

Deal Making Begins

Then, in late breaking news, word hit the Street that Endo Pharmaceuticals inked a deal to buy Indevus Pharmaceuticals for about $370 million. The combined company will market nine products; Indevus currently sells treatments for overactive bladder, prostate cancer and central precocious puberty. It is seeking approval of drugs to treat treat hypogonadism and bladder cancer.

According to CNBC’s Mike Huckman big analysts think the Indevus deal could be a harbinger of things to come. “This could be a record year for Bio-Pharma M&A,” he says.

The Next Big Takeover?

Pfizer could be in the market for a partner. CEO Jeff Kindler tells Reuters, "we are open to opportunities and constantly looking at those which are big, small and in-between."

Takeover targets are wide ranging and include Biogen, Amylin , OSI Pharma, and Vertex Pharma , says Huckman. But the lists go on and on.

So, how should you trade biotech?

"I think we are going to see deals," says Karen Finerman. But she cautions against betting on one company in such a volatile sector. In the past she’s advocated taking a basket approach with iShares NASDAQ Biotechnology Ind .

"You might want to keep an eye on Gilead , Onyx ,Myriad and Orexigen , ahead of the JP Morgan healthcare conference on Jan. 12th," adds Mike Huckman.

In fact, you might want to pay special attention to Orexigen. Analysts expect OREX could present late stage results on a weight loss drug, very soon.

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