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How to Play Biotech Without Getting Burned

ETFs can offer the right prescription for targeting this volatile sector.

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With merger activity heating up in the biotech space, we thought it would be useful to discuss the best ways for individual investors to participate in the action. As with any cutting-edge technology industry, huge potential upside mingles with potential disaster in biotechs. After a relatively quiet showing in 2007 (3% total return), the Amex Biotechnology Index (^BTK) is up almost 7% year-to-date (through Aug. 25)--not too shabby considering the S&P 500 Index is down about 12.5% over the same period. So what's behind the recent action in the biotech sector?

The answer: big pharma is on the prowl. It is no secret that mature drugmakers flush with cash and drying pipelines are looking to bolster their anemic growth by targeting smaller firms with promising drugs and innovative research-and-development programs. (For more on this, check out our recent Video Report). For example, on the heels of Roche's (RHHBY) pursuit to acquire the remaining portion of  Genentech (DNA) that it doesn't already own (see our Analyst Note), we saw  Bristol-Myers Squibb (BMY) make an offer to acquire  Imclone (IMCL) (see our Analyst Note). While this signals that the trend of big pharma firms looking to build out their pipelines via acquisitions is alive and well, we'd note that this trend has been building over the past few years. Take for instance  GlaxoSmithKline (GSK) buying Sirtris,  AstraZeneca (AZN) buying MedImmune,  Merck's (MRK) purchase of Millennium, and  Wyeth (WYE) buying Haptogen.

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John Gabriel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.