Biotech boom: After nine days of unrelenting selling, has the death knell been sounded for high growth pharma stocks?

A wave of medical innovation has sent biotech shares rocketing nearly 200 per cent in just three years. But the party appears to be over – since mid-July, the index has fallen 25 per cent, well in to bear market territory.

 

£1,000 invested in the Nasdaq biotechnology index three years ago would have been £2,912 at the market’s 17 July peak – before falling nearly 25 per cent to £2,200 yesterday. 

 

This astonishing growth could not go on forever, but what at first seemed a healthy correction has become an accelerating bear market. 

 

Investor fervour soured when US presidential candidate Hillary Clinton said the sector needs regulation to combat “price gouging”. Clinton spoke after it emerged biotech firm Turing Pharmaceuticals bought the rights to a decades-old drug used to treat complications from HIV. Chief Martin Shkreli raised its price per pill by 5,000 per cent from $13 (£8.50) to $750.

 

Investors nervous over the heights biotech has reached took the opportunity to lock in profits. “The price falls have just been appalling,” says Tom Becket of Psigma Investment Management. “It shows people had just clung on to the easy holds in their portfolios… People were looking for growth opportunities in a low growth world.”

 

But the continuing falls reflect something deeper than profit-taking. 

 

The biotech boom has drawn comparisons – not unfairly – with the dotcom bubble. In the run-up to the millennium, investors cast aside established measures of corporate health and backed what they believed were future leaders in the “new economy”. Sales, profits and cashflow were disregarded, and a fortune was raised for profitless companies. 

 

Now, the biotech sector has been booming on the hopes that the next-generation of medicine is arriving. Biotech firms have plans for advancements in stem cells, regenerative medicine and therapeutic proteins. There was a string of record-breaking IPOs last year with $6.3bn raised, according to EP Vantage, for early-stage firms – some of which only have one product candidate in trials.

 

Professional investors aim to spot innovations before others. But trying to put a valuation on biotech can be impossible, Becket says.

 

Some of these companies are more akin to so-called Big Pharma, well-established firms with revenues in the millions. But three-quarters of the 148 companies on the Nasdaq index had no profits at all, and just five companies account for more than 80 per cent of the whole sector’s earnings. “The hot areas of healthcare science are gene therapy and parts of immuno-oncology. Many of these companies do not really have earnings and have been very reliant on sentiment,” explains Bruce Harington of Stenham Asset Management.

 

Perhaps biotech will change the face of medicine. But as with the dotcom bubble, trouble comes when investors call the revolution too soon. Tech giants would go on to revolutionise business and make a fortune, but that was not in the year 2000. 

The question for biotech is whether firms warrant their valuations today. For the small players, it could be years before products in trials are brought to market, and even longer before they are profitable. 

 

For the industry superstars, some investors will see this as a buying opportunity. “This puts the sector back on our radar, especially the four mega companies Biogen, Amgen, Celgene and Gilead Sciences,” says Domenico Daniele of Daniel Stewart. 

 

Gilead had $12bn net income last year, and some investors think it's stock is now good value, following the sell-off. “There are now some very cheap stocks. Gilead trades on eight times forward earnings. Valeant is at a similar level,” Harington says.