Biotech Is Officially in a Bear Market. Is It Time to Panic?

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There was once a time when the biotech sector could do no wrong. Venture capital was literally coming up out of the floor to invest in the latest new development platforms. Secondary offerings were also being met with plenty of buyers. And let's not forget that IPOs were lined up at the gates just waiting for their chance to go public on the Nasdaq or NYSE. Best of all, optimists were making bank with the SPDR S&P Biotech ETF (NYSEMKT: XBI  ) up nearly 300% since its recession lows.

But that was six weeks ago.

Source: Urbanicsgroup, Flickr.

The new biotech reality is actually quite grim. Shares of the SPDR S&P Biotech ETF, which currently has 84 different companies in the fund, are officially in bear market territory after dropping 27% in just the past six weeks! The selling has really accelerated over the past three weeks leaving biotech investors to wonder whether or not now is the time panic and sell everything.

The answer to that question really depends on what your investment time horizon is and what you've been buying within the biotech space.

Over the past couple of weeks I've looked at a number of reasons why the biotech rally may be coming to a close. Last month I opined that three factors -- frothy post-IPO valuation, acquisitions that were a reach on a price-basis, and investors counting their chickens before their hatched with wholly clinical-stage pipelines -- could ultimately send the biotech sector lower. It appears that many of these are finally coming to fruition.

Day-traders and speculators: beware
What this means is that traders with short time horizons, or considerably more speculative investors who are purchasing wholly clinical-stage pipelines, could encounter more volatility and more potential downside if the biotech sector continues to hiccup.

Take Intercept Pharmaceuticals (NASDAQ: ICPT  ) as an example. Not to take anything away from its nonalcoholic steatohepatitis experimental drug obeticholic acid which was stopped early in a phase 2 study, but we don't even have the complete data on this trial yet. Yes, the therapy met its primary endpoint with statistically significant results, but there are also visible questions about the safety of OCA for long-term use. With no FDA-approved drugs on the market and a current value of $5.2 billion this is the type of company whose investors could be in for a wild ride.

If, however, your plan is to hold biopharmaceuticals that are established, profitable, and/or have quality pipelines for a lengthier period of time, then this biotech swoon isn't an opportunity to panic. Instead, it could be the opportunity you've been waiting for to go shopping.

Buy established companies
Simply speaking, established companies have existing products already on the market and they often have a robust pipeline as well. They're the type of company you buy and hold without losing sleep each night. One that readily comes to mind is Swiss-based Roche (NASDAQOTH: RHHBY  ) .

Roche is an oncology giant with such blockbusters are breast cancer drug Herceptin, lung and brain cancer drug Avastin, and rheumatoid arthritis/cancer drug Mabthera/Rituxan. However, Roche also has therapies in a number of other settings including neuroscience, virology, respiratory diseases, ophthalmology, and cardiovascular diseases, just to name a few.

Source: Roche. 

This product diversity gives it many different avenues of growth should one of its segments suffer a setback. Were that not enough, Roche also has more than 100 clinical studies ongoing at the moment, which doesn't even count what it has going on in the preclinical setting as well. Tack on an annual dividend that's often around a 2% yield and you can see why I believe Roche could easily help you weather the biotech bear market.

Buy profitable companies
If you prefer a little more risk in your diet but don't want to deal with the expectation of quarterly loss after quarterly loss, an easy way to avoid the biotech doldrums is to pick out highly profitable companies. Although Gilead Sciences (NASDAQ: GILD  ) has taken it on the chin like its peers in recent weeks, I believe it represents a shining example of a high-growth profitable company to consider.

2013 Annual Report, Source: Gilead Sciences. 

Gilead has a number of key catalysts it's working with, including the recent approval of Sovaldi, the first oral Hepatitis C medication that in select genotypes can be administered without interferon (interferon is known to cause flu-like symptoms in patients). In addition, Gilead also has Stribild, its four-in-one completely in-house HIV-1 prevention medicine designed for treatment-naïve patients. In the past with HIV therapies such as Atripla Gilead has had to split its revenue stream with other biopharmaceutical companies, but this completely in-house pill gives it an opportunity to dominate the market, pad its margins, and provide hope to HIV patients that their disease progression will slow or possibly even stop.

Gilead is very profitable with Wall Street projecting about $9 billion in profits by fiscal 2015 with a revenue growth rate over the next five years of an eye-popping 33%. If the biotech sector continues to sink, Gilead is the type of company you could lean on.

Buy diverse pipelines
Lastly, even though it's been battered over the past month, a diverse pipeline such as Isis Pharmaceuticals (NASDAQ: ISIS  ) could give investors multiple chances to hit a home run.

At the moment Isis only has one FDA-approved therapy, Kynamro, which was brought to market in collaboration with Sanofi. Clearly Kynamro alone isn't enough to push Isis to a nearly $4 billion valuation given that losses are expected to continue for the near future.

However, the fact that Isis has 34 clinical and preclinical studies ongoing with approximately one dozen different collaborative partners certainly puts into perspective the optimism behind Isis. You've often heard me make the baseball analogy that each study is the equivalent of a pitch and the company is the batter that's swinging for the fences. More pitches equate to more chances for a company to hit a home run. Isis, in this case, has the potential to be quite "the slugger," and it's for that reason investors may want to consider adding its bountiful pipeline to their portfolio.

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Read/Post Comments (7) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 13, 2014, at 5:52 PM, badeconomy wrote:

    Great analysis Gilead by far is the most profitable and revenue growth no other bio company comes even close. Insurence companies have no choice except paying for Sovaldi , it would be their advantage financially and legally and they know it.

  • Report this Comment On April 13, 2014, at 6:26 PM, portefeuille wrote:

    I think ISIS, GILD and RHHBY are "decent buys" (no recommendation ;)), but so may ICPT and all of those except RHHBY are current positions of our #zzporte portfolio. We did quite a bit of buying on Friday, but are still far from "fully invested".

  • Report this Comment On April 13, 2014, at 10:35 PM, Nala wrote:

    Gilead is far and away the "best in breed". The article's earnings/sales & profits are actually better than stated.

  • Report this Comment On April 14, 2014, at 5:29 PM, Nixic wrote:

    I think you guys need a little more diversity in your news sources... For one, all Biotech stocks are going to drop through the floor in the long run. Being virtually outlawed across the globe it's surprising they made it this long. Google operation Divest Monsanto for some perspective.

    I'm not exactly sure what projects Gilead has worked on in the past but an oral medication for a disease that has never even been isolated? Seriously, HepC, never been proven to exist. Smells like a skunk and probably a bubble/bust situation to me. Take it for a short-run but get out before the commercials with the side-effects start airing..

  • Report this Comment On April 14, 2014, at 5:32 PM, roseys wrote:

    Anyone have an opinion for Celgene (CELG)?

  • Report this Comment On April 14, 2014, at 11:54 PM, DukeMontrose wrote:

    Dear Chief foolish FOOLS =

    re biopharma = please have a lookout for two envelopes i sent to you by snail mail last Friday + Saturday from Sarasota Florida =

    Multi=baggers are being born all the time=

    old ones like ?Apple, AMZN slowly fade away?

    There is a time + season for every thing.

    When the time comes, we find the new -borns.

  • Report this Comment On April 14, 2014, at 11:57 PM, DukeMontrose wrote:

    {Technical note = please allow like Seeking Alpha to

    "EDIT" our posts = often need editing after I admire them when published.)

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Sean Williams

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and in investment planning topics. You'll usually find him writing about Obamacare, marijuana, developing drugs, diagnostics, and medical devices, Social Security, taxes, or any number of other macroeconomic issues.

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