Can Biotech Stocks Bounce Back?

Biotechs still feel too risky for most investors

If you know me at all, you know that I’m a huge fan of biotech stocks. A breakthrough at one of these companies leads to more than just profits — it means we’ve made another step forward in improving the health and livelihood of people everywhere.

Some of these stories are truly inspiring, like the headlines we saw this week about a team of scientists who eliminated leukemia in 94% of their trial patients using experimental “T-cell therapy.”

Right now, however, I can’t help but notice a flood of competing programs attacking a more or less fixed selection of clinical targets. In other words, there just isn’t enough room in the drugstore for every biotech company to be a blockbuster, making it tough for the group to recover from the sunken morale that has kept stocks at depressed levels since last summer.

biotech stocks bib

As much as I love biotech, it’s an industry currently sitting somewhere between “risky” and “speculative” on the market radar. Amid the swaths of widespread volatility, investors have been dumping perceived risk — and there’s a lot of risk in biotech to dump, because if a program doesn’t make it all the way through the approval process, all the capital that went into funding its progress is lost.

Meanwhile, stocks continue to plunge as companies brawl for market share. When juggernauts like Regeneron Pharmaceuticals (REGN) and Gilead Sciences (GILD) go head-to-head on treating hepatitis, for example, dozens of smaller start-ups quietly pursuing the same target get wiped out. They’re on the ProShares Ultra NASDAQ Biotechnology Index (BIB), too, so any success GILD and REGN would have seen is counterbalanced by failure on the low end, and the sector overall remains a speculative bet.

We’ve seen companies like Regeneron release fantastic results alongside the kind of programs people have been dreaming of for years — like the Food and Drug Administration’s (FDA) approval of Praluent back in July — and yet the stock barely tips the scale. Seven months later, share prices are down 35%. More big headlines like T-cell therapy could help lift spirits, but I think it’s going to take a more consistent stream of good news to reflate the mood.

GILD, Amgen (AMGN), Celgene (CELG) and the other top 10 or 20 holdings are heavily weighted enough that their recovery can easily lift the index 10% to 15% from where it is now. But I don’t think we’ll see the industry push back to record peaks anytime soon, as investors who’ve been burned by a “hot” theme are now extremely cautious about picking up the matches again.

By the time the pain wears off, we might have someone in the White House who wants to reform the entire business model altogether. If and when that happens, it’ll be time to reevaluate. But for now, biotech companies have a lot of work to do to restore investors’ confidence.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader,Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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