Biotech stocks started the year off on the wrong foot (to put it mildly). While the S&P 500 shed a little over 5% during January, the iShares Nasdaq Biotechnology ETF (IBB 0.00%) dropped by a whopping 21% last month, according to data provided by S&P Capital IQ.
Perhaps most impressively, a staggering 93% of all publicly traded biotech stocks with market caps greater than $300 million finished the month in the red. Keeping with this theme, 21% of this same cohort of companies lost more than 30% of their value in January.
Given the rapid nature of this steep decline across the bulk of the biotech industry, it's no wonder investors are searching for answers right now. So, to shed some much-needed light on this mystery, let's take a deeper look at biotech's news flow and monthly performance data last month.
The worst-performing biotechs tended to be clinical-stage companies
The first trend that becomes apparent is that developmental biotechs got slammed the hardest in January -- but perhaps for good reason. Specifically, the worst offenders last month were Alkermes (ALKS -0.67%) and Sarepta Therapeutics (SRPT -2.42%), with both stocks falling on negative catalysts for their lead drug candidates:
Alkermes dropped after the company announced that its experimental treatment for major depressive disorder, ALKS-5461, failed to meet its primary endpoints in two late-stage studies. The drug still has a chance to shine in a third ongoing study, but its chances of eventually reaching the market are clearly diminished at this point.
Sarepta tanked after the FDA released an overtly negative review of its experimental muscle-wasting treatment called eteplirsen ahead of the drug's advisory committee meeting. Put simply, the FDA doesn't appear to be impressed by the drug's mid-stage trial results, significantly lowering the drug's odds of gaining a thumbs-up from the agency during this review cycle.
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. Celldex Therapeutics (CLDX -2.78%), for instance, fell by over 40% last month, even though the company is expected to announce the latest interim results for its late-stage brain cancer vaccine Rintega that many believe could be a positive catalyst for the biotech.
The bottom line is that dozens of clinical-stage biotechs felt the market's wrath last month, in part because of the negative news flow emanating from Alkermes and Sarepta.
Blue-chip biotechs fail to stop the slide
Unfortunately, the top dogs in biotech like Celgene (CELG) and Gilead Sciences (GILD -1.43%) didn't help matters. At the J.P. Morgan Healthcare conference, Celgene released weaker-than-expected annual guidance, and the biotech went on to miss fourth-quarter earnings estimates later in the month, as well, due to slowing Revlimid sales and rising costs on the R&D side of the business.
Gilead's presentation at J.P. Morgan did little to assuage investors' fear regarding the sustainability of the company's hepatitis C revenue this year, especially as new competitors enter the market. At the close of the month, the company then announced a sudden change in management, with John Milligan taking over for the company's highly respected CEO John Martin. A combination of this shake-up and the announcement of FDA approval of a competing hepatitis C therapy triggered another sell-off in Gilead shares.
All told, these two blue chip biotechs turned in a dismal month:
While numerous pundits have been laying the blame for biotech's blood bath on the U.S. presidential election and/or the economic slowdown in China, I think the industry's problems are mostly homegrown. Because of the stunning success of numerous clinical-stage companies of late, investors seemingly forgot that experimental drugs more often than not fail to reach the commercialization stage of their life cycle. The point is that these multibillion-dollar market caps that have been commonplace among clinical-stage companies in years past probably weren't entirely warranted -- especially in light of recent events.
On the top end, Wall Street has repeatedly projected super-high revenue and earnings figures for Celgene over the last few years. And this trend has apparently caught up with the biotech. That's not a failing on Celgene's part, but rather on Wall Street for pushing the envelope a bit too far. After all, Celgene still reported a 24% jump in net product sales in the fourth quarter of 2014, compared to the same period a year ago.
Gilead, for its part, has been utterly powerless to convince the market of its earnings potential in the hep C space -- even after crushing consensus for several quarters in a row. Given the stock's forward-looking P/E ratio of a mere 6.87, the market seems hell bent on trying to force the company into a high-dollar acquisition, presumably one that deepens its pipeline in the lucrative oncology arena. And until that happens, the market probably won't assign much of a premium to Gilead's top line.
The bigger picture is that biotech took some major hits from both the clinical-stage and revenue-generating ends of the industry, creating a vortex of heavy selling in January.
Did this sell-off create a buying opportunity? I think so. At the end of the day, the main value drivers for biotech are all still very much in play. Namely, the U.S. population is still growing older on average, more patients are being covered under Obamacare every year, and the rate of innovation in biotech is only accelerating, if anything. That's why I think investors that grab shares of blue chips like Celgene and Gilead, or perhaps the iShares Nasdaq Biotechnology ETF, at these depressed levels will ultimately turn out to be happy campers.