Biotech ETFs Decline a Sign of a Bursting Bubble?

Joel Anderson |

While it’s still too early to tell, investors appear to be bailing on biotech stocks. Or, at least, they appear to be trying to make up their minds about it. Thursday’s trading ultimately proved to be a bloodbath for biotech stocks, with the iShares NASDAQ Biotech Index ETF (IBB) losing over 2.5 percent on the day and falling as far as 3.8 percent before a last-hour rally pulled shares back up.

2014 and Up-and-Down Year for Biotechs

That would bring the year-to-date gains for the IBB to 2.83 percent, a modest but notable gain for an ETF of its size. However, that small gain isn’t even half of the story. So far, 2014 has seen some pretty choppy trading for biotech stocks, with momentum appearing to carry the segment to new highs early in the year only to pull back in mid- February. After hitting a peak on February 25, IBB has declined almost 14.25 percent.

Biotech Bubble?

Now, the word “bubble” has started to, well, bubble up. During the massive run-up for the stock market in 2013, the biotech industry was among the biggest gainers, with IBB climbing almost 70 percent over the course of the year. That momentum didn’t appear to halt in a significant way through the first two months of 2014, either, as IBB gained another 16.45 percent in less than 60 days.

However, since the start of March, the momentum that appeared to be carrying biotechs higher appears to have been halted.

Waxman Letter Sparks Sell-off

The biggest drag on the segment clearly came from the desk of Henry Waxman, whose accusatory letter sent to the CEO of Gilead Sciences (GILD) , lambasted the company for the $1,000 a pill price tag for their new Hepatitis C treatment and demanded an explanation of their pricing methodology.

This, of course, raised a deeper question: was Waxman’s shot across the bow driving the losses, or was it the catalyst for a broader, long-overdue pull back from bubbling biotech stocks?

More to the story?

The letter, released on March 20, prompted a steep sell-off for IBB in the next few days, with investors concerned that more government scrutiny of pricing might reduce the potential profitability of those companies. But Thursday’s losses actually raised as many questions as they answered because they come on the heels of a three-day run that saw IBB bounce back 5.33 percent, seemingly defying those naysayers that had insisted that the bubble was bursting.

What’s more, Thursday’s losses may not have much to do with the overall health of the biotech industry at all. With yesterday’s positive news regarding the ADP jobs report and factory orders, and Friday bringing the Labor Department’s job report, there appeared to be a general pull back from momentum stocks in general prior to tomorrow’s big economic news. The NASDAQ, home to far more small-cap, tech, and biotech plays than its large-cap oriented brothers, finished down 0.91 percent on a day when the Dow held even and the S&P only lost 0.11 percent. And that’s including a late rally in the final hour of trading, losses for the Nasdaq were as much as 1.4 percent.

Indications of Biotech’s Direction in Coming Year Still Murky

So, the take-away is that…there is no take-away.

Some may look at biotechs coming off an absurdly bullish run (IBB was up almost 140 percent in the 14-months prior to the end of February and has quadrupled in value since the start of 2009) and believe that they’re due for a fall. In that case, this pullback is just the start of a longer correction.

Others may point to Waxman’s letter driving a week of losses, but the rebound that started on Monday as being a bounce back, also citing that the start of a new quarter might reset the books for some on the buy side and drive new buying after the jobs report comes out. If the jobs report is strong, which market watchers would probably interpret as proof that slower figures from winter were due to the harsh weather, it could lead buyers streaming back into the momentum plays they’re abandoning on Thursday. And, in that case, the recent downswing for biotech could just end up creating a number plays that are even more enticing from a value standpoint.

It’s likely going to be at least another week or two, if not longer, before the current direction of the biotech industry starts to become clear. For an industry that’s often impossible to accurately value, the trends may take time to really emerge, but, for ETF traders who can accurately guess which way things are headed, there could be a lot of money to be made.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
GILD Gilead Sciences Inc. 72.02 -0.76 -1.04 12,324,818
SILXY Silex Sys Ltd Spon Adr 1.63 0.00 0.00 0

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