The bubble burst cometh? Biotech stocks down 21% since July
- The Nasdaq Biotechnology Index is falling as investors sell in response to companies' lower sales forecasts, concerns about downward pressure on drug prices, and a sense that the market for biotech stocks is overheated.
- In September, institutional investors sold healthcare stocks more than any other sector in the S&P 500.
- This week, both Greatbatch, which makes electronic equipment for medical devices, and Illumina, the biggest maker of DNA decoders, lowered their sales forecasts for the year. As a result, their stock prices fell by 11% and 12%, respectively, during the period after the news was released. A Wall Street Journal report pointing out that biotech giant Biogen regularly hiked the price of multiple sclerosis drug Avonex in the face of falling revenues and lower demand for the med also hit the biotech index.
In July, the biotech sector was riding high after a long run-up, which eventually led to an index with a P/E ratio of 280. However, the tide has turned as investors respond to companies' lowered expectations. Two examples include Greatbatch and Illumina, which lowered sales forecasts and watched as their stock prices fell. While Greatbatch had anticipated sales of $730 million previously, the company has lowered its forecast to a range of $685 million to $695 million. Likewise, Illumina had expected $603.2 million in revenues for the fourth quarter, but has now re-forecast anticipated revenues to $570 million.
Add to that the pushback against rising prices from payers, government officials, and Democratic presidential candidate Hillary Clinton, who has accused the industry of price gouging, and it's clear that the biotech index is under extreme pressure (thank Martin Shkreli and the now-infamous Daraprim price hike). In fact, most of the 143 companies that comprise the Nasdaq Biotechnology Index hve taken a hit since the selling spree started.
Many analysts think that the sell-off is long overdue and expect a correction. This can only mean that there may be buying opportunties ahead. But after months of speculation regarding when, not if, the biotech sector would see its bubble burst, investors and industry oberservers seem to be getting their answer.