Despite 2012 being a year where investors were increasingly skittish as the year wore on, the exceptionally risky biotechnology industry enjoyed an exceptionally good year. While the group has come off a bit from its peak in the early fall, the group is up more than 30% year to date - making it not only a strong outperformer relative to the S&P 500 (which is up about 12%), but one of the best-performing groups of the year.

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Has Hepatitis C Handed the Baton to Oncology?
While companies with strong positions in hepatitis C drug development enjoyed a great performance in 2011, it looks like companies that focused on oncology will rule the roost for 2012.

Companies like Pharmacyclics (Nasdaq:PCYC) (up almost 300%), Medivation (Nasdaq:MDVN) (up more than 115%), Synta Pharmaceuticals (Nasdaq:SNTA) (up about 80%), Onyx Pharmaceuticals (Nasdaq:ONXX) (up more than 75%) and Ariad Pharmaceuticals (Nasdaq:ARIA) (up about 60%) have all found themselves near the top of the performance charts largely on the strength of their oncology platforms.

This strong performance has not just been a product of blind hope either. Medivation, Onyx and Ariad have all seen significant product approvals in 2012 and should be looking forward to many years of solid revenue growth. Medivation saw the FDA approve its prostate cancer drug Xtandi in September, and analysts expect both Xtandi and Johnson & Johnson's (NYSE:JNJ) Zytiga to become billion dollar-plus drugs in metastatic prostate cancer treatment.

Onyx saw the FDA approve Kyprolis for multiple myeloma in July (ahead of schedule) and this, too, should be a drug with sales potential in excess of $1 billion as multiple myeloma is both a relatively common and serious form of cancer. For Ariad, the story is a little more complicated. While the company did get approval for its leukemia drug Iclusig very recently (December), the stock saw a major sell-off due in part to the FDA's requirement of a "black box" safety warning for the drug.

SEE: Pharmaceutical Sector: Does The FDA Help Or Harm?

Obesity Produced Some Outsized Gains
The FDA's somewhat surprising willingness to work constructively with companies developing anti-obesity drugs also charged this small sub-sector of the biotechnology industry. Arena (Nasdaq:ARNA) has seen its share price nearly quadruple on the approval and upcoming launch of Belviq, while Vivus (Nasdaq:VVUS) has seen a less impressive, but still market-beating move of 35% this year on the launch of its obesity drug Qsymia. Last and not least, while Orexigen (Nasdaq:OREX) is still in clinical trials with its weight-loss drug, shares have risen more than 200% this year on optimism tied to what is seen as a more industry-friendly FDA with respect to obesity drug development and approvals.

Plenty of One-off Stories, too
While investors love to look for themes in biotech (hepatitis C, oncology, autoimmune, obesity, etc.), that doesn't mean that a strong one-off story can't outpeform as well.

Sarepta Therapeutics' (Nasdaq:SRPT) has been one of the top performers in the industry (up more than 450%) on the surprising success of eteplirsen in Duchenne Muscular Dystrophy. Optimism on short bowel syndrome drug Gattex has propelled NPS Pharmaceuticals (Nasdaq:NPSP) higher by almost 50% this year, and encouraging early-stage trial data seems to have renewed investor optimism in RNA interference drug developer Alnylam Pharmaceuticals (Nasdaq:ALNY), sending the stock up more than 100% in 2012.

SEE: A Primer On The Biotech Sector

The Bottom Line
Although the biotechnology sector did not see as many acquisitions or major licensing announcements in 2012 as analysts had forecast in 2011, strong clinical trial data and a "risk on" attitude from investors nevertheless pushed many of these stocks up throughout the year. This marks three straight strong years for the industry, and that ought to have investors a little concerned as valuations and expectations have increased significantly. While individual companies with strong clinical data and near-term catalysts like panel meetings or FDA approval should continue to perform well, investors would likely do well to expect the market to be more demanding and difficult in 2013.

At the time of writing, Stephen D. Simpson has owned shares of Alnylam since 2010.

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