Why Is Biotech Down and Will It Stay That Way?

When presidential candidate Hillary Clinton vowed to fight price gouging in the drug market, biotech stocks dropped around the globe. But one tweet can’t be held responsible for this widely struggling market. Fortune magazine reported that biotech stocks have fallen 25 percent this year, and with numbers that substantial, there have to be other causes at play.
So why is biotech down —and more importantly, do the experts believe it can recover?

Negative media coverage

A series of scandals, like those involving Turing or Valeant (NYSE:VRX), have certainly had a hand in biotech’s reported downward trend. Both of these drug companies had a monopoly on key, life-saving medications, whose costs they promptly hiked.
Public outrage followed.
“Drug pricing is a big black box, so it’s hard for investors to model that into these stocks,” biotech analyst Hartaj Singh told CNBC. He concluded that, “This being an election year, a lot of investors have figured it’s better to take some money off the table.”
But price gouging isn’t unique to the biotech or pharmaceutical industry. We recently saw one medical device company, Mylan (NASDAQ:MYL), raise the cost of its EpiPen, for example.
So while negative media coverage has undoubtedly had a hand in biotech’s run of bad luck, it’s simplistic to label that the whole story.

A lack of news

In fact, some analysts say it was the lack of news that led to the dive. “There was a real lack of provocative news out of the JPM [Healthcare Investing] conference,” Jake King declared in this Forbes article, labelling biotech “a space where investors focus myopically on the next data point or regulatory decision.”
He went on to note the bluebird bio (NASDAQ:BLUE) fell 20 percent after telling investors that results from gene therapy trials wouldn’t be available until year-end.
No news, it would seem, is bad news—at least in biotech.

Poor clinical trial results

But as a matter of fact, there was actual bad news coming.
Writing for The Motley Fool just a month later, George Budwell argued that disappointing clinical trial results from several biotech companies, like Alkermes (NASDAQ:ALKS) or Sarepta Therapeutics (NASDAQ:SRPT) contributed to the industry’s weaker start to 2016.
“These two disappointing events seemingly triggered a broader sell-off among nearly all clinical-stage biotechs, especially those closing in on a clinical or regulatory update,” Budwell suggested.

Part of the natural cycle

The simplest answer as to why biotech is down might just be this: a drop was long overdue. Fortune noted that prior to this plummet, biotech enjoyed “a remarkable five-year bull run, which has been the greatest in the industry’s history.”
Indeed, several experts have suggested that after such great success, a lull was inevitable.

An optimistic outlook

But that doesn’t mean biotech won’t be bullish again—at least according to some analysts. Robert Bombace, a portfolio manager at Frost Investment Advisors, sees good things ahead for the industry, in terms of product development: we’re “going from the Model T stage to the space-shuttle stage,” he told Investor’s Business Daily.
Meanwhile, the prospect of biotech takeovers is promising to some investors. “A lot of assets have gotten very cheap. This could kick-start mergers and acquisitions,” Mindy Perry, a portfolio manager for Manulife Asset Management, told MarketWatch.
And of course, the lower cost of biotech stocks might also make them appealing to investors going forward.
Bottom line? While biotech may have taken a blow in recent months, it’s too early to count it out.
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Securities Disclosure: I, Chelsea Pratt, hold no direct investment interest in any company mentioned in this article.