The high flying, and top performing, sector of 2013 – biotech – delivered impressive gains last year, on the back of increasing mergers and acquisition activities, expansion into emerging markets, increasing health care spending, mounting demand for novel drugs and Obamacare.
However, this sector, which also enjoyed a strong bull rally over the past five years with gains extending to a stellar 257%, has recently been hit hard by bubble fears as the Fed unwinds its massive bond buying program.
This is especially true, as the Nasdaq Biotechnology Index is currently trading with a PE approaching 400, and almost 94 times estimated earnings, which is considered to be quite an exorbitant valuation by many market experts.
Apart from concerns over valuation, market experts believe that the surging IPO volume is also a key warning sign for possible risks for this hot sector of 2013. U.S. biotech IPOs have seen the fastest start to the year (read: Profit from the Booming IPO market with these ETFs).
However, the biotech sector’s worst slump came on March 21, when it suffered the steepest decline since October 2011 on the back of political risks. The sell-off came as the Democrats in the U.S. House of Representatives questioned GileadSciences Inc. (NASDAQ:GILD) – one of the top U.S. biotech companies – over the high price of its new hepatitis C drug, Sovaldi.
The product priced at $84k for a 12-week treatment is considered to be far too expensive and has brought in fears related to potential regulatory risk and pricing caps for the biotech sector. Strong pricing power is considered to be one of the foremost traits for the investment case for this industry (read: 3 ETFs Tumble Most on Biotech Sell-off).
Given the concerns over valuation and pricing power, biotech ETFs have been the worst performing ETFs in the past one month with all of them posting losses in the double-digit range. None of the products in this space managed to survive the recent slump, though these ETFs are still trading in the green in the year–to-date time frame.