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Are investors hitting the brakes on biotech? The biotech sector's one of the most boom-or-bust areas for investors, where fortunes can be won or lost. For most of the first half of 2013, it seemed the former was true, as the Nasdaq Biotechnology Index soared by double-digit percentage growth.
Over the past five days, however, the index shed nearly 5%, part of a 7% drop over the past month. Should investors be worried about this volatile sector, or are the past week's losses a remote event you should discount? Let's look at why some of the biotech index's big names were on the move this week.
Even biotechs can't escape Bernanke
To be fair to biotech investors, the entire market took a beating this week behind Federal Reserve Chairman Ben Bernanke's announcement that the central bank could explore tapering back quantitative-easing bond buying later this year if the economy continues to improve. That won't affect the biotech market much, but in a classic overreaction from Wall Street, the sector fell with every other one on Wednesday and Thursday.
Onyx Pharmaceuticals' (UNKNOWN: ONXX.DL ) fall this week offers one example. Onyx shares plunged more than 9% over the past five days despite little news from the company. In fact, Onyx had been doing quite well with a double-digit gain year-to-date before this week; the company commands two strong oncology drugs that it's partnered on with Bayer in kidney cancer treatment Nexavar and colorectal cancer therapy Stivarga, the latter of which Onyx predicts will reach blockbuster status, with peak sales in excess of $1 billion. All this week's drop means for investors is a dip to buy this promising stock cheaper.
That's not the case for the week's biggest loser, however. Idenix Pharmaceuticals (UNKNOWN: IDIX.DL ) shares plunged by more than 31% this week after Friday's 30% nosedive, completely wiping out this stock's year-to-date gains. Thank the FDA for this one. after the agency requested more safety information from the company's developmental hepatitis-C oral drug IDX20963. The drug's still in preclinical stages, but the FDA put clinical holds on two of Idenix's drugs last year, making this a very unwelcome trend at the company as competitors move ahead in the oral hep-C market.
Medivation (NASDAQ: MDVN ) shares also were hit hard this week, falling 7.8% over the past five days. Shares fell 8% alone on Monday, after Johnson & Johnson (NYSE: JNJ ) agreed to purchase Aragon Pharmaceuticals in a $1 billion deal. It wasn't a game-changer for J&J, considering Aragon's developmental prostate cancer therapy ARN-509 is in phase 2 trials, although if the company can advance the drug to a regulatory victory down the road, it could one day fill in for J&J's current blockbuster oncology drug Zytiga after its patent expires.
Analysts think the drug can one day become a rival to Medivation's recently approved prostate cancer pill Xtandi, however. J&J expects the prostate cancer market to grow over time, perhaps allowing both drugs to co-exist -- a view supported by Citi analyst Yaron Weber, who expects Xtandi eventually to command 40% of the market. In all, the acquisition, even by a company as powerful as J&J, isn't a deal-breaker for Medivation.
Building up for the long term
While you can certainly make huge gains in biotech and pharmaceuticals, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.