Did the Biotech Bubble Burst?

02/19/2016 7:00 am EST

Focus: STOCKS

According to Reuters, the tech sell-off is so bad it seems increasingly likely the market will see very few tech IPOs this spring, so the staff at Kapitall.com takes a closer look at how the rout in biotech is affecting four biotech stocks that made their market debut earlier this year, along with each stock's post-IPO performance.

Biotech stocks have gone from being one of the darlings of the market to being some of its biggest losers.

It's a tough time to be in tech, especially if your business is biotech. The Nasdaq Composite Index, which heavily features tech and biotech stocks, is down 9.45% for the year, while the benchmark S&P 500 is down 5.73%. According to Reuters, the tech sell-off is so bad it seems increasingly likely the market will see very few tech IPOs this spring.

But there have been a handful of IPOs already in 2016; all four were biotech stocks, and, after being hit hard during the market rout, all but one are trading above their IPO price after a three-day rally. The biotech sector can be extremely volatile and investing in these stocks can bring high rewards, but with them come serious risks.

The biotech industry has also been heavily scrutinized for some time. A quick Google Trends search shows that biotech bubble interest first spiked in early 2014 and increased further a year later. Much of the criticism directed toward the industry focuses on the widespread lack of revenue streams, which stems from many biotech firms going public prior to conducting any human trials of their drugs. Per a 2012 study conducted by biotech market research firm KMR, 97% of preclinical drugs never make it to market. Nevertheless, biotech firms continued to rack up high valuations; even Federal Reserve Chairwoman Janet Yellen commented on the situation back in 2014, saying valuations within biotech seemed to be "substantially stressed."

Former hedge fund manager and pharmaceutical CEO Martin Shkreli also delivered a blow to biotech last year when he raised the price of an HIV drug from $13.50 to $750 a pill. With that decision, Shkreli made an enemy of Hillary Clinton, who subsequently tweeted her intention to combat that type of price gouging within healthcare. The tweet sent the iShares NASDAQ Biotechnology ETF (IBB) down nearly 5% by market close that day and nine of the Nasdaq’s biggest losers were biotech stocks.

Fast forward five months and it appears the biotech bubble may have burst. As previously mentioned, there have only been four biotech IPOs thus far in 2016; by February 6, 2014, 12 biotech companies had gone public and 13 biotech IPOs were scheduled for the following two-week period. Axovant (AXON), which had the biggest biotech IPO to date at almost $3 billion, is trading around $12-$13. That’s below its IPO price of $15 a share and considerably lower than the all time high of $31.17 reached during its first day of trading in June 2015. The company, like many of its peers, went public with only one preclinical drug to its name. 

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Then there's the ProShares UltraPro Nasdaq Biotechnology ETF (UBIO). The ETF, which aims to outperform the Nasdaq Biotechnology Index by a factor of three, is down 52.52% for the year and is the third-worst performing ETF on the market. The SPDR S&P Biotech ETF (XBI) isn’t faring much better: it’s down 27.42% over the same period. And the iShares NASDAQ Biotechnology ETF—the largest biotech ETF—has dropped 21.28% since the beginning of the year.

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The three-day market rally has lifted some biotech stocks out of the red…for the time being. However, the issues that contributed to the sell-off remain: no proven sources of revenue, fears of overvaluation, and potential pricing pressure that lowers the costs of specialty drugs. To see the remaining charts and read the entire article, click here…

(Price data sourced from Zacks Investment Research. IPO price and return data sourced from Renaissance Capital. All other data sourced from FINVIZ.)

By the Staff of Kapitall.com

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