During a recession, people do without.  They’ll put off a nice vacation, a new flat screen TV, even a trip to the dentist.  But a cancer patient is not going to stop treatment because times are tough.  A parent whose child has a rare ailment like Gaucher disease is going to find a way to pay for medicine.

While no industry is truly immune to financial pressure, biotech is faring better than most.

Celgene Corp. (CELG) recently “warned” that its earnings per share will only grow by 20% in the first quarter.  It’s considered a warning because Wall Street analysts expected 25%.  Meanwhile, there are probably 1,000 CEOs that would sell their soul to report 20% growth in the first quarter.

According to business intelligence firm IBISWorld, biotech revenues are expected to grow by more than 10% in 2009.

In certain areas of the country, the biotech industry is helping to stabilize local economies.  In the battered San Francisco Bay Area, South San Francisco is holding up relatively well thanks to the large number of biotech companies in the city. 

“Biotech is one of the few growth industries in California, and it will continue to grow,”
Michael Lappen, South San Francisco’s economic development coordinator, recently told the San Francisco Examiner.

South Florida is ground zero for the real estate collapse.  But recent efforts to recruit biotech companies are paying dividends.  Biotech companies increased their recruitment efforts by 5.5% in the sunshine state.  Nationwide biotech companies added 27,000 new jobs in February.  That compares to losses of 101,000 jobs from the private sector during the month, according to the U.S. Labor Department.

All of these statistics are nice.  But how do biotech stocks perform in recessions?

According to the Economic Cycle Research Institute (ECRI), the last recession started in late March 2001 and ended in November 2001.  As you can see from the chart below, biotech spectacularly outperformed the Standard & Poor’s 500 Index and recorded gains of over 30% in that time period.

During the bull market that followed, the biotech sector doubled the performance of the S&P 500.

In the current recession, the S&P Biotech Index is down, but it has lost only half as much as the S&P 500, which is kind of remarkable in that the sector is considered risky.

How to Invest in Biotech

Interestingly, the SPDR S&P Biotech ETF (XBI) is not as heavily weighted toward the blue chip biotech names as IBB.  The most heavily weighted stocks in XBI are Myriad Genetics Inc. (MYGN) BioMarin Pharmaceutical Inc. (BMRN), Vertex Pharmaceuticals Inc. (VRTX), United Therapeutics (UTHR) and Amylin Pharmaceuticals (AMLN).

Avoid biotech mutual funds.  The available funds have high loads and management fees and are generally not worth the extra expense.

To ramp up the performance of your biotech holdings, consider sprinkling in a few well chosen early stage companies.  These stocks will carry a greater amount of risk than a blue chip like Gilead, but these smaller names have the potential to double or more in a short period of time.