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Biotech ETF Sheds 'Stigma,' Hits 8-Year High

Biotechnology stocks, as measured by the iShares Nasdaq Biotechnology ETF, broke out to an eight-year high as a blossoming drug pipeline sparks buyout interest and signals the maturing of an industry that many investors had written off as un-investable for the larger part of the last decade.

“People haven’t expected this breakout because of that ‘biotech’ label, which carries an investing stigma,” said Guy Adami, managing director for Drakon Capital and a ‘Fast Money’ trader. “Companies like Celgene are real stories with monster pipelines.”

The biotech sector hit this milestone following a takeover of Facet Biotech and a FDA panel win by InterMune after the bell Tuesday night. Abbot Laboratories bought Facet, a maker of cancer and multiple sclerosis drugs, for $27 a share, or a premium of more than 60 percent. InterMune shares surged more than 60 percent after an FDA advisory panel gave the green light to the company’s experimental drug that treats lung scarring. Earlier this month, Japan’s Astellas Pharma launched a $3.5 billion hostile bid for OSI Pharmaceuticals, targeting its cancer drug Tarceva.

The iShares Nasdaq Biotechnology Index Fund is up 11 percent so far in 2010. This year’s outperfomance follows a giant plunge at the end of 2008 and 6 years where the ETF virtually was little changed as any takeovers and successful drugs, were canceled out by failed partnerships and FDA approvals.

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What’s different this time is that many biotech stocks have gone from one drug lotto tickets to diversified companies, generating cash and positioned to benefit from an aging population even more than its big pharmaceutical brothers, investors said.

“The free cash flow yield (defined by free cash flow divided by market value) for large cap biotech at seven percent currently is actually approaching that of the much more mature pharma group at nine percent,” wrote Geoffrey Meacham, J.P. Morgan’s biotechnology analyst, in a note to clients this morning. “We are bullish on continued biotech outperformance and would put new money to work in the group.”

The favorite pick of Adami and Meacham is Celgene , a biotech sporting a $28 billion market value. The company is known for its blockbuster cancer drug Revlimid, but also possesses “a pipeline that looks interesting, but receives little credit from Wall Street,” wrote Meacham.

Meanwhile, the Pharmaceutical HOLDRs ETF, a proxy for large pharma, is little changed for the year. “I am not so sure that biotech names are scientifically that far ahead of pharmaceutical names, but the market is certainly voting as such,” said Steve Cortes, President of Veracruz LLC. “Perhaps one present reason is that biotechnology companies seem to skirt the political wrath of Washington, while traditional pharma is right in the crosshairs.”

While ETFs give you broad diversification to the group, they will not provide the kind of pop seen from InterMune and Facet. If you have the stomach and capital to play individual names, Jon Najarian suggests you look at Alkermes.

“I am focused on phase II and phase III trials, looking for outperformance due to positive results in those trials,” said Najarian, co-founder of OptionMonster.com and TradeMonster.com. “We have such a situation later this week with Alkermes, which provides the technology to make Amylin Pharmaceuticals’ diabetes treatment a time- released, once per week injection.”

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Trader disclosure: On March 10th, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Terranova Is Long Oil Futures; Terranova Owns (XLE); Terranova Is Short (XLY); Terranova Owns (GLD) March Puts; Terranova Owns (GOOG), (AAPL), (DELL), (EMC), (MSFT); Terranova Owns (CAL) April Puts; Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Najarian Owns (BAC) Call Spread; Najarian Owns (C) Calls; Najarian Owns (INTC) Calls; Najarian Owns (YHOO) Calls; Kelly Owns (AMZN) Calls; Cortes Is Short Treasuries; Cortes Is Long Oil; Karabell Owns (AAPL), (C), (CSCO), (JPM), (GOOG); Kinahan Owns (C); Kinahan Holds A Long Position In (WFC)

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