Are Biotech Stocks a Popping Bubble? That’s the $84,000 QuestionMichael P. Regan
Some of the bull market’s hardest-charging stocks are looking a bit worn out.
The Nasdaq Biotechnology Index is teetering on the brink of a correction, or a drop of 10 percent from its record in February. The gauge of 121 drugmakers has lost 9.7 percent from Feb. 25 through last week after rallying 369 percent from a six-year low in March 2009.
The rally in biotech is a study in optimism, with investors in search of a compelling growth story pushing the Nasdaq index to more than 400 times reported earnings and as much as 94 times estimated earnings. That valuation is 25 times the trailing P/E of the Standard & Poor’s 500 Index, making biotech a top contender for skeptics searching for bubbles as the Federal Reserve unwinds unprecedented monetary stimulus.
A technical analyst studying biotech charts at MKM Partners, Jonathan Krinsky, warned about the Nasdaq Biotech ETF on March 6, mostly because of how “extremely extended” it had risen above its average level from the past 200 days. A “fairly sizable correction over the next few months” is possible, he said.
The ETF and the index it is based on were both down at least 2.3 percent as of 10:26 a.m. in New York, meaning they will officially enter a correction if they close at that level.
Enter the optimists. Oppenheimer & Co. analysts Boris Peaker and Matthew Pommer are confident more gains are in store. Most of the biotech index’s slump came on March 21, when it sank 4.4 percent after Gilead Sciences Inc. was asked by Democrats in the U.S. House of Representatives to explain how the company set an $84,000 price for its Sovaldi drug, a hepatitis C treatment.
“A key attribute of the biotechnology industry investment thesis is strong pricing power following successful development,” they wrote in a note to clients today. “We believe that has not changed, and is unlikely to in the foreseeable future.” Attractive stocks they point to: Celldex Therapeutics Inc., Incyte Corp. and NPS Pharmaceuticals Inc.
Krinsky isn’t convinced. Based on the heavy volume of the exchange-traded fund tracking the Nasdaq index on March 21, “sellers are becoming more prevalent,” Krinsky wrote yesterday in a note to clients. He predicts another 5 percent to 7 percent decline in the ETF from last week’s closing price before it reaches technical levels that could support it.
If that happens, investors in the industry may start to focus on what kind of pain pills the companies are developing.