Biotech Rout Back as Profits Become Latest Investor Concern

  • Greatbatch and Illumina issue disappointing sales forecasts
  • Stocks are down 26 percent after reaching a high in July

A bull market favorite continues to lose its luster.

Biotechnology stocks plunged Tuesday, with an index tracking the industry at one point heading for its worst loss since August 2011, after earnings warnings from companies that sell technology to drug firms and concern about pharmaceutical pricing reignited selling that began three weeks ago.

The Nasdaq Biotechnology Index, which soared past the Standard & Poor’s 500 Index throughout the bull market with a 420 percent rally by the end of 2014, is down 25 percent from its high in July. It fell as much as 6.6 percent today as investors questioned the industry’s outlook for profit growth.

“There’s certainly been a shift in sentiment in biotech, I think that goes without saying,” said James Gaul, a portfolio manager at Boston Advisors LLC, which oversees $2.8 billion. “It had such a strong run for such a long time and needed the reason to sell off.”

Prospects for earnings growth in the larger health-care sector, one of just four S&P 500 groups that analysts expected to expand profit in the third quarter, took a hit Tuesday as Greatbatch Inc., a Frisco, Texas-based maker of electronic equipment for medical devices, and Illumina Inc. in San Diego, a maker of gene analysis systems, lowered sales forecasts.

Greatbatch sales this year will be between $685 million and $695 million, the company reported, compared with earlier estimates of as much as $730 million. Revenue at Illumina, the biggest maker of DNA decoders, will be about $570 million in the fourth quarter, compared with the average forecast of $603.2 million, according to estimates compiled by Bloomberg.

“As the market turns around, biotech turns around,” Larry Peruzzi, director of international trading at Cabrera Capital Markets LLC in Boston, said by phone. “It’s long investors looking at the fundamentals and the hedge funds playing it day-to-day, and you have these pre-announcements today putting pressure on the long investors.”

More than 130 companies in the 143-member biotech index fell, with Illumina shares losing 12 percent and Greatbatch sliding 11 percent as of 1:45 p.m. in New York. Exact Sciences Corp. plunged 46 percent after a U.S. panel of medical experts questioned the benefits of a colon cancer test.

Biotech’s faltering appeal picked up momentum last month, entering a bear market after Democratic presidential hopeful Hillary Clinton suggested in a tweet there may be “price gouging” in the market for prescription pills. The slump has presented a difficult test for one of the year’s best-performing industries, which recovered from five pullbacks of more than 6.6 percent over a 14-month period ending in August.

Institutional investors in September sold health-care stocks more than any other sector in the S&P 500, according to a report by FBN Securities chief market technician JC O’Hara. As they sold one of last year’s biggest winners, they bought one of the biggest losers: energy shares, which saw the sharpest increase in buying.

Energy stocks gained as much as 3 percent Tuesday as biotech plunged 6.6 percent, the biggest discrepancy between the two sectors since November 2011. While energy shares began the year trading at a valuation of 14.3 times earnings, the Nasdaq biotech index boasted a ratio of more than 280 times earnings.

“Everyone was talking about it being overpriced for some time but it kept going higher,” said John Kornitzer, portfolio manager and chief executive officer of Kornitzer Capital Management Inc. “Now we’re getting a correction.”

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