Shares of the nation’s largest biotechnology companies are trading at or near record levels as the year comes to a close, a payoff for investors in companies that have been putting intensive focus on cancer and other hard-to-treat diseases over the last few years.

The American Stock Exchange biotechnology index, which tracks some of the largest companies in the industry, hit a five-year high powered by optimism over recent or impending treatment approvals at the Food and Drug Administration. Shares of the industry’s bellwether company, Genentech Inc., hit their highest point ever earlier this month, though they’ve pulled back a bit since then.

Analysts said the large biotech companies, which include Genentech and a handful of other big names, such as Amgen Inc. and Gilead Sciences Inc., are beginning to replace traditional pharmaceutical stocks in the holdings of many investment funds that want a piece of the growing health care market.

The strong performance is largely confined to the high end of the biotech industry — the companies that have put blockbuster drugs on the market and have grown into vast enterprises with thousands of employees and drug factories humming night and day.

The Amex index, which tracks the performance of these companies, is up 110 percent since bottoming out in mid-2002, compared with an increase of 30 percent over the same period in the Standard & Poor’s 500-stock index. For 2005, the biotech index is up 25 percent, while the broader market, as reflected by the S&P 500, rose a mere 4 percent.

By contrast, a separate index that reflects the share prices of smaller biotech companies, the Nasdaq Biotech Index, has essentially mirrored the broader market, up about 3 percent for the year.

The traditional drug industry hit a rocky patch this year: Merck & Co., once the world’s most respected drug company, is defending itself against a slew of lawsuits claiming it hid safety problems with its Vioxx painkiller. And the next couple of years don’t look much brighter for the big pharmaceutical companies, with numerous drug patents due to expire, potentially costing the industry billions of dollars in revenue.

The century-old drug industry has historically used chemical techniques to discover its products, whereas the 30-year-old biotechnology industry has used genetic techniques. The latter approach is paying off for the leading companies, with a string of spectacular drugs for cancer and other tough diseases coming to market recently. And the companies have managed to sell them at extraordinary prices, sometimes exceeding $50,000 a year for each patient.

Genentech, of South San Francisco, Calif., was the first biotech company, founded in 1976. It struggled for years, but recently has been on a roll. Genentech now sells the world’s top- selling cancer drug, Rituxan, and a recently-approved Genentech cancer product, Avastin, looks set to surpass it. Genentech revenues are pproaching $7 billion a year.

Some analysts have a similar concern about the broad market in biotech shares. Merrill Lynch, Pierce, Fenner & Smith Inc. warned investors in a recent report that with many new cancer drugs coming to market, competition is stiffening.

(www.mailtribune.com)