Nasdaq Hopes To Hit A Nerve With New Index

September 19, 2007

Nasdaq plans to launch a new neurotechnology index on September 25.
 

Nasdaq Stock Market Inc. is pushing into a new index niche with the release of the Nasdaq NeuroInsights Neurotech Index, which covers the neurotechnology industry. It has partnered with NeuroInsights, a research firm that focuses on neurotechnology, to create the index, which will launch on September 25.

The index includes only companies involved in the research, development, manufacture and marketing of drugs, treatments, medical devices and diagnostics for the brain and nervous system. The medical problems and diseases that are addressed by the neurotechnology field are wide-ranging and include spinal cord and brain injuries, stroke, Alzheimer's disease, Parkinson's disease, depression, obesity, schizophrenia and sleep disorders.

It's a field that's likely to thrive as many of these ailments are age-related and the baby boomer generation is growing older. According to a report by NeuroInsights, brain-related illnesses cost the U.S. roughly $1 trillion annually; on a global level, that figure is about $2 trillion. Two billion people suffer from brain-related illnesses worldwide, and 100 million of them are in the U.S.

The most obvious competing index would be the HealthShares Neuroscience Index which underlies the HealthShares Neuroscience ETF (NYSE: HHN). Although the Nasdaq index has 32 components and the HealthShares index has 22 components, they only have six components in common. However, the HealthShares index includes companies that are listed on major foreign exchanges as well as those listed on U.S. exchanges, which probably accounts for much of the lack of overlap between the two.   

To be eligible for inclusion in the Nasdaq NeuroInsights Neurotech Index, a company must qualify as a pure play neurotechnology company as defined by NeuroInsights. In addition, among other requirements, potential components must be trading on a major U.S. exchange and have a minimum market capitalization of $200 million, a minimum three-month average daily trading volume of 100,000 shares and a minimum closing price of $3.00. All companies that meet the eligibility requirements are included in the index. Components are reviewed on a semi-annual basis, although companies that no longer meet its eligibility requirements can be deleted at any time.  

It is rebalanced on a quarterly basis and follows a modified market-cap-weighting scheme. The five largest components are capped at an 8% weighting in the index (unless they are less than 8% of the index, that is), with excess weight beyond that limit distributed proportionally among the other components. All other components with weightings above 4% that have not been capped at 8% will be capped at 4% of the index.

The index's methodology also says that the Nasdaq reserves the right to modify the index in order to maintain its investability and its representation of the sector.   

As of August 31, the five largest components included Biogen Idec, Cephalon, Elan, Forest Laboratories and Shire, all weighted at 8% of the index. Below those were Alkermes, Biovail, Endo Pharmaceuticals, Integra Life Sciences, Sepracor, Valeant Pharmaceuticals and XenoPort, all weighted at 4%.

The Nasdaq has said that it has already seen widespread interest in the index from financial institutions eager to base products on it. However, the HealthShares Neuroscience ETF has failed to thrive, with assets that are only slightly above $2 million, so it is unclear what sort of reception something like an ETF based on Nasdaq's new index might find.

 

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