The biotech sector has fallen, and it doesn't seem able to get up. Despite an earnings season that has gone reasonably well, biotech stocks don't seem able to get off the floor. The Amex Biotechnology Index lost 4.3% last week and is now down more than 8% year to date after falling another 1.7% to 455.73 on Monday. The Nasdaq Biotechnology Index, which tracks a broader swath of the sector, including more small-cap stocks, lost almost 5% last week, and is down 10% for the year as of Monday's close. An overall weak market and geopolitical uncertainty take some of the blame for biotech's malaise, for sure. But on a micro level, biotech firms can't seem to catch a break. For a sector that typically runs hot and cold, biotechs, right now, are downright frosty. "The strategy these days seems to be sell good news, and sell bad news faster," said one frustrated biotech fund manager. That has certainly been the game plan during second-quarter earnings season, so far. Genentech ( DNA) kicked things off by meeting EPS estimates, reporting stronger-than-expected sales of its new cancer drug Avastin and raising 2004 EPS guidance (albeit still within analysts' current ranges). Investors took the news in and sold the stock. Likewise, Amgen ( AMGN), Chiron ( CHIR), ImClone Systems ( IMCL), Millennium Pharmaceuticals ( MLNM), and Medimmune ( MEDI) all met or beat consensus expectations for the second quarter, but investors were selling. Only Genzyme ( GENZ), which beat expectations for the quarter and raised its top-line sales guidance, has seen any significant buying this earnings season. Of course, summer is typically a fallow period for biotechs, with the sector taking a breather until activity -- in terms of industry conferences and regulatory happenings -- picks up again in the fall. But this postearnings selloff has many market observers doubtful that the major indices will be able to recover and see green for the year.
Survey SaysI conducted an informal and unscientific sentiment poll of more than two dozen biotech money managers, traders and buy-side research analysts. A clear majority of respondents agree the biotech sector is in a deep hole and will be unable to finish 2004 up for the year. (Certainly the sector has little chance of matching or besting its performance in 2003 when the Amex Biotech Index closed 2003 at 490, up 45%, and the Nasdaq Biotech Index closed 2003 at 724, up 47%.) But these biotech mavens are more optimistic when it comes to forecasting the performance of the sector from current levels. A clear majority believes the sector will finish the year higher than Monday's close. It's important to note, however, that many of those same respondents feel things could get worse before they get better -- which means the sector may not have put in its bottom just yet. Of course, moving biotech stocks higher will require getting a wider circle of investors -- and not just these dozen-plus specialists -- to start buying. Wayne Rothbaum, a hedge fund manager with Quogue Capital, doesn't necessarily see that happening any time soon. "What props up the biotech group is when momentum guys, the big aggressive growth funds and market-timers want to get into the sector. But now, these guys have been selling stocks as fast, or faster, than they were buying them," he said. "And price deflation is worse now because there is no buying support." Biotechs also will have to overcome the impression that valuations are still not cheap, by historical standards. While companies generally met or exceeded earnings expectations for the second quarter, they did not significantly raise EPS forecasts. And in a bear market, especially one accompanied by the threat of rising interest rates, valuation multiples are typically compressed.
If biotech does rebound, it will likely come this fall when a gaggle of investment banks will be holding biotech investor conferences in September and October, per custom. The medical meeting calendar also gets busy, including important cancer-research meetings scheduled for September and December. But compared with years passed, the back end of 2004 is not filled with as many clinical and regulatory catalysts that so often attract the attention of investors. Still, there are some potential market-moving events expected in the coming months, which include:
Eyetech (EYET) and Pfizer (PFE) bringing their drug Macugen (used to treat vision loss in older people) in front of a Food and Drug Administration advisory panel on Aug. 27. In late September, the FDA is expected to announce an approval decision for Gilead Sciences' (GILD) new combination HIV pill. In October, Maxim Pharmaceuticals (MAXM) is expected to release results from a phase III study of its skin cancer drug Ceplene.