The biotechnology, health-care and pharmaceutical companies that are clumped uncomfortably into a small pocket of the Toronto Stock Exchange have been ignored by many investors in recent years, often for good reasons. At first glance, the sector still remains weak, but analysts say some of the firms are breaking away from the pack.

The group is known as “life sciences” stocks, a catch-all for very diverse companies that share only one common goal: to create products or services that will help keep us all healthy, or at least alive, for as long as possible.

There are about 80 such companies listed on the TSX, and they run the gamut from old-fashioned health-care services to global pharmaceutical firms, makers of innovative medical devices and the upstart biotechs, a state-of-the-art stable of firms that are pushing the frontiers of modern science.
The companies do everything from researching cloning to running retirement homes, producing vaccines or trying to find a cure for diabetes and solutions to the two biggest killer diseases: cancer and heart disease.

Such diversity also brings a big difference in size. The sector ranges from well-established heavyweights such as Mississauga, Ont.-based Biovail Corp.,
which began the year with a quoted market
value of about $3.1 billion, down to Quebec-based Ibex Technologies Inc., worth a comparatively paltry $9.2 million.

Bay Street is the world’s second-largest life sciences market, with the TSX-listed companies carrying a total market capitalization of more than $23 billion.
However, the TSX capped health-care index, which consists of only 12 companies, has tended to underperform the much broader S&P/TSX composite since the new
millennium began. The health-care index fell 17.4% last year alone, and was down about 5% as of mid-March vs a S&P/TSX gain of about 7%. The sector has also proven to be an elusive target for mutual fund managers in search of impressive returns (see sidebar, right).

Life sciences analysts, however, are quick to note the health-care index is weighted and very strongly influenced by two companies:
Biovail Corp. and MDS Inc. Picking individual stocks — rather than the “basket approach” — is the best way to make money in the sector, say analysts.

Indeed, the index itself reflects the apples-and-oranges makeup of the sector. It includes Aeterna Zentaris Inc., a Quebec City-based pharmaceutical firm that focuses on new cancer drugs; Extendicare Inc., a long-term care company that can accommodate up to 34,400 residents; Neurochem Inc., a Quebec-based biotech firm specializing in neurological disorders; and Vasogen Inc., a Mississauga-based biotech that aims primarily at research and ways to improve cardiovascular treatments.
(See accompanying story, below).

Campbell Parry, health-care and biotechnology analyst at Scotia Capital Inc.
in Toronto, says Canada’s life sciences sector has generally been lagging the overall market for the past three years, and for a wide array of reasons: “The industry itself is plagued by poor drug approvals, uncertainty, high risk from an investor point of view, all coupled with [poor] fundamentals.”

By the end of the 1990s, most investors had grown tired of life sciences stocks,
particularly the “pie in the sky” forecasts by some upstart biotech firms, Parry says. “It got to a point that 10 companies would walk in the door to make presentations and only one would walk out with anything,” he says.
“Investors had been burned too many times.
When you got down to it, many [companies] were just too risky; they should have remained in the private sector.”

The U.S. Securities and Exchange
Commission’s current investigation into the accounting and financial disclosure practices of Biovail, which will now go back to June 2001, is only casting a further cloud over the the sector.

“Biovail is very volatile,” Parry says, noting it also accounts for about 30% of the TSX’s health-care index, followed by drug maker MDS, which holds about 20%-25%.

He sees both Biovail and MDS “going sideways” for the remainder of 2005.
Therefore, he says, “The index itself is not going to be all that exciting.”

Other analysts agree, saying the pull, or drag, on the index by just Biovail and MDS can be very misleading for the entire group.

But Parry says the general stock price weakness in the group, combined with upbeat prospects for a some firms, should rekindle some attention from advisors and investors. “The whole sector looks interesting,” he says. “The valuations are way down and there has been three years of underperformance, so 2005 could be the last breath for the sector.”