Biotech: Like Lambs to the Slaughter

After rallying yesterday, biotech stocks are getting pounded, as Gilead (GILD), Amgen (AMGN) and Celgene (CELG) slide today.

The iShares Nasdaq Biotech ETF (IBB) fell 5.6% to $221.89 today, while the SPDR S&P Biotechnology ETF (XBI) dropped 6.5% to $129.79. Gilead Sciences fell 7.3% to $65.48, Amgen declined 4.9% to $114.11 and Celgene finished down 5% at $139.98.

What’s causing the slide? Nothing fundamental. Sure, the market’s worried about how much Gilead Sciences will be allowed to charge for Solvadi but there’s nothing screaming sell now beyond market sentiment.

Matarin Capital considers the roll of sentiment in the biotech selloff:

While the biotechnology stocks came into March like a lion, they went out like a lamb. They were extremely weak during the last few weeks of the month, when sentiment worsened as Federal Reserve Chairwoman Yellen shifted the criteria for future rate hikes. (High expectation stocks are more prone to suffer with rising interest rates, because of the sensitivity of the valuation of their future cashflows to the level of the discount rate. In this sense they are very similar to zero coupon bonds.) Another hit to biotech investor sentiment came when questions were raised in the U.S. Congress about the pricing of industry leader Gilead's newest drug at $1,000/pill. The reason for the shift in sentiment may, at the end of the day, be of little matter. Once sentiment shifted, selling brought more selling. As is often the case with momentum stocks, an investor wants to ride the wave of momentum until it comes crashing down, and then head for shore… quickly.

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Credit Suisse analyst Ravi Mehrotra and team predict think they’ll find a bottom soon. The reason:  Valuation. The S&P 500 trades at 16.5 times forward earnings, according to Morning star, while Gilead trades at 11.4 times, Amgen trades at 12.9 times and Celgene trades at 15 times.

Clearly, predicting the exact timing and magnitude of the bottom for any stock/sector is a near-impossible exercise, but bottom-line (get the pun?), we reiterate our view that large-cap biotech is unlikely to trade at a discount to the S&P500 for a sustained period of time given the quality and magnitude of growth of the Biotech sector. (Rather, it should be trading at a significant premium given the higher EPS growth rates – ~4x S&P500 EPS growth.)

The only problem: Right now, nobody cares.