This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Another Bad Day in Biotech Stocks, Pace of Selling Accelerates

By: Adam Feuerstein | 03/24/14 - 11:21 AM EDT

Stocks in this article: GILDCELGAMGNBIIBALXNIBB

Update: At 11:15 am EDT, the Nasdaq Biotechnology Index is down 5%. To answer my own question below, it seems like investors woke up Monday ready to sell. Those scary-looking charts will need to be updated after the close. 

Friday's 4%-plus drop in biotech stocks was fun. Ready for Monday? 


Let's take a look at where things stand. 

The Nasdaq Biotechnology Index (NBI) ended February up more than 16%, but remember, stocks were very weak on the last day of the month, leading to some questions about how the sector would perform in March. Not so great, it turns out...


IBB Chart
IBB data by YCharts

The biotech sector is still outperforming the broader market for the year, but the February gains are gone.


IBB Chart
IBB data by YCharts

I thought this next chart was really interesting. It overlays the performance of Gilead Sciences (GILD) and the IBB: Almost perfect synchronization. This chart shows you how pushback against the $1,000-per-day price of Gilead's hepatitis C pill Sovaldi can spread fear across the entire biotech sector.  [I checked the IBB against the other big-cap biotech stocks Celgene (CELG), Amgen (AMGN), Biogen Idec (BIIB) and Alexion Pharma (ALXN) but didn't see the same pattern.]


GILD Chart
GILD data by YCharts

Where does the sector go from here? Do investors buy Friday's dip or will we see more weakness? Obviously, I don't have an answer, no one does. But for those downplaying the significance of the Gilead-Sovaldi price controversy, I'd say remember that biotech stocks, like most sectors, trade not only on fundamentals but on sentiment and the confidence in future earnings potential. Those arguing against a biotech bubble say price-to-earnings (P/E) ratios for biotech stocks are nowhere near historical highs. True, but if investors -- particularly generalists investors -- worry about the sustainability of drug pricing, then confidence in the future "E" of the P/E ratio falls. We call that "P/E compression" and it's not a good thing for stocks. 

ISI Group drug analyst Mark Schoenebaum took to Twitter this weekend to make a similar point:


J.P. Morgan analyst Geoff Meacham doesn't believe in the biotech bubble and is holding a conference call for investor clients Monday morning at 10:15 am EDT to offer reasons why the sector still has room to grow:

Meacham:


We believe that the sector remains broadly attractive from a valuation/pipeline/growth perspective, particularly in large cap. Notably, the average 3-year revenue and EPS CAGR for the top 10 biotechs (market cap) is 4.5X and 3X that of the S&P500, yet the P/E/G on 2015-2016 forecasts for biotech is ~0.7 versus the S&P at ~1.4. Regarding the industry pipeline, product cycles are very long in biotech (>10 years) and dozens of major launches are occurring or are about to occur (Sovaldi, Tecfidera, Imbruvica, Pomalyst, Otezla, Eylea, Kalydeco, Xtandi, Linzess asfotase alfa, Vimizim, idelalisib, evolocumab, alirocumab, etc.). In addition, we estimate that at least 50+ compounds/label expansions that have some level of de-risking are largely unaccounted for in Street models. Admittedly, companies with earlier-stage pipelines that haven't been fully de-risked are being awarded a higher probability of clinical success, but drug development has become more efficient, particularly for orphan drugs. The recent concern on pricing for Gilead's Sovaldi has caused much anxiety; at the end of the day, the benefit/risk and cost/benefit profile remains quite striking and we doubt that the recent Congressional inquiry would lead to an "innovation tax" (i.e., forced material discounts).

Good luck out there today. 

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.

Markets

DOW 17,801.04 +82.04 0.46%
S&P 500 2,061.26 +8.51 0.41%
NASDAQ 4,712.2340 +10.3670 0.22%

Adam's Tweets

Brokerage Partners

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
Real Money Pro

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Trifecta Stocks

Trifecta Stocks analyzes over 4,000 equities weekly to find the elite 1% of stocks that pass rigorous quantitative, fundamental and technical tests.

Product Features:
  • Model portfolio
  • Trade alerts
  • Recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
Stocks Under $10

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Dividend Stock Advisor

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Breakout Stocks

Bryan Ashenberg, using sophisticated stock screening and fundamental research, identifies potentially explosive small and mid-cap stocks.

Product Features:
  • Model portfolio
  • Small-cap and mid-cap focus
  • Intraday trade alerts
  • Weekly roundups
Options Profits

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
Top Rated Stocks Top Rated Funds Top Rated ETFs