No, This Is Not the Bio-Pharmapocalypse

Moneybox
A blog about business and economics.
April 14 2014 4:59 PM

Don’t Stress. It’s Not the End of the World for Biotech Stocks.

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Biotech stocks have posted some ugly losses lately.

Photo by John Moore/Getty Images

If you’ve been following the markets, then you’ll know that the last few weeks have been ugly ones for biotech stocks. The Nasdaq Biotechnology Index has shed 17.8 percent since March 18, dragged down by losses in big names like Gilead Sciences, Alexion Pharmaceuticals, and Biogen Idec. On April 4, investors pulled $372 million from the biggest biotech-focused exchange traded fund—its worst ever redemptions.

Alison Griswold Alison Griswold

Alison Griswold is a Slate staff writer covering business and economics.

In spite of all that, this isn’t necessarily the bio-pharmapocalypse.

“The biotech sector got a little bit ahead of itself and we’re now in a period of extended—and I mean weeks, months, not eternal—profit-taking or consolidation,” says Ted Tenthoff, managing director and senior biotechnology research analyst at Piper Jaffray.

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To put the current sell-off in perspective, biotech indexes soared more than 200 percent over the past five years. Their gains easily doubled those seen by the broader market in the same period, and lately investors had started questioning how long that momentum could last. “We’ve had, frankly, an astounding move higher,” Tenthoff says.

With all that upward movement, the biotech sector was long overdue for a pullback. And that’s what we’re seeing now. Investors are selling and profit-taking to consolidate their positions, which in turn drives down the market. But once that’s finished, the sector might have plenty more room to run.

Tenthoff argues that we’re in a “golden age” of biotech for three main reasons:

  1. Big-cap biotech stocks like Gilead, Alexion, and Biogen are among the fastest growing companies period. If you’re a big-cap growth fund manager, you can’t ignore biotech right now.
  2. The sector is seeing an “unprecedented” level of productivity in terms of new drug approvals and late-stage projects.
  3. Big pharmaceutical and biotech companies have “mountains of cash” sitting on their balance sheets.

“I still think we’re in the middle innings of a multi-year biotech bull market,” he says. “This is a painful but necessary pause as we consolidate our recent gains before we move higher.”

It’s interesting to note that the recent sell-off has not been due entirely to losses in biotech, but more broadly part of a risk-off investing shift from “growth” to “value.” Companies with growth stocks are expected to show above-average growth in revenues, earnings, or cash flow, while value stocks are ones investors think the market is overlooking.

In a Monday report, Morgan Stanley’s U.S. equity researchers observed that, historically, value stocks tend to keep doing well following strong value rallies (like the one we’ve had lately) and growth stocks won’t necessarily bounce right back. “The expectation that many investors we talked to last week have—of a growth rebound following a run-up in value stocks—is not borne out by history,” they write.

In the aftermath of “extreme value rallies,” Morgan Stanley finds that energy and staples outperform, while technology and telecom underperform. Health care, which includes biotech, falls somewhere on the lower-middle end of the spectrum.

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Morgan Stanley has trimmed its exposure to technology stocks by 2 percent, but continues to place a huge overweight on health care and pharmaceuticals like Bristol-Myers Squibb. That should probably be somewhat reassuring—they’re not jumping out of biotech yet, either.

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