Biotech Resilience Put to the Test as Stocks Drop Into Bear Market

  • Clinton tweet on drug prices sparks worst week since 2008
  • Nasdaq Biotechnology Index down 22 percent from July high

Biotechnology stocks plunged into a bear market amid concerns over drug prices, presenting one of the year’s best-performing industries with its biggest test of resilience.

The Nasdaq Biotech Index saw five pullbacks of more than 6.6 percent over a 14-month period ending in August, and each time the gauge recovered the loss within about a month. Even after last month’s market-wide correction, the iShares Nasdaq Biotech ETF regained much of its loss in a three-week period.

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Investors have been singling out biotech since Democratic presidential hopeful Hillary Clinton suggested in a tweet on Monday there may be “price gouging” in the market for prescription pills. The losses piled up throughout the week, giving the biotech gauge a 22 percent drop from a record in July.

The scrutiny, combined with the degree of the share decline, has some money managers questioning the group’s ability to claw its way back from yet another downdraft.

Gradual Process

The issue of drug pricing “really overhangs growth potential until it can get cleared up,” Bill Schultz, who oversees $1.2 billion as chief investment officer at McQueen, Ball in Bethlehem, Pennsylvania. “If we do eventually get a recovery, it will probably be a more cautious and gradual process than we’ve been seeing.”

The Nasdaq Biotech Index dropped 5.1 percent at 4 p.m. in New York, with declines picking up in afternoon trading. The gauge fell 13 percent for the week, the most since August 2011. It has slumped 22 percent from a record in July, meeting the definition of a bear market, and is poised to end 10 straight quarters of gains, the longest streak in data going back to 1994.

After starting Friday up 1.3 percent, the Nasdaq biotech gauge slipped into negative territory within an hour. It slid steadily in afternoon trading, picking up speed after 2 p.m. to reach a session low at about 3:15 p.m.

“Once you start the ball rolling here sometimes it just takes a life of its own,” said Mark Kepner, an equity trader at Themis Trading LLC in Chatham, New Jersey. Friday was “the last day of the quarter for some firms that put out their quarterly holdings based on numbers as of Wednesday, which is settlement for trades,” he said.

Amid the sector selloff, Celgene Corp. saw its biggest weekly decline in six years, falling 12 percent for the week. Regeneron Pharmaceuticals Inc. sank 11 percent for week while Vertex Pharmaceuticals Inc. dropped 17 percent, its worst weekly performance since 2011. Biogen Inc. slumped 9.5 percent in five days, sliding more than 40 percent from its March high.

One of the market’s biggest winners this year, the Nasdaq Biotech Index rose 26 percent through July, outpacing the nearly 12 percent gains for a broader health-care industry group and the 2.2 percent increase in the S&P 500.

Prior to the heightened scrutiny around drug pricing, optimism over the industry sent Celgene Corp., Gilead Sciences Inc. and Vertex up more than 150 percent since the beginning of 2013. Merger activity also underpinned gains for the sector. Valeant Pharmaceuticals International Inc., still up 39 percent in 2015, has announced 10 acquisitions this year.

Volatile Nature

For market watchers like John Stoltzfus of Oppenheimer & Co., the size of biotech’s decline is jarring, but par for the course for a sector known for its price swings.

“It’s the nature of biotech to be volatile,” he said. “This is, of course, the worst that we’ve seen in a while, but just a little earlier when we looked at biotech it was up a large double digit percentage in spite of having had something like 6 to 8 pullbacks in a range of 7 to 8 percent in a 12 month period.”

The meltdown in biotech also presents a challenge for the broader stock market, as the S&P 500 struggles to recover from its first 10 percent decline since 2011. Friday’s drop in the sector helped erase a 1.1 percent rally in the S&P 500, and sent the Nasdaq Composite Index down 1 percent.

“Health care was kind of the stalwart and we’re starting to see cracks in leaders,” Channing Smith, a managing director at Capital Advisors Inc. in Tulsa, Oklahoma, said by phone. The firm oversees about $1.6 billion. “When you see that, it’s one more reason to step back and be cautious.”

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