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LOS ANGELES — Confused investors looking for advice on where biotechnology stocks are headed might get a clue from the head of one company in the sector.
Rajesh C. Shrotriya, chairman and chief executive of Spectrum Pharmaceuticals, says with conviction that a lot of biotech shares are overvalued because, simply put, they've been "selling a dream" instead of focusing on fundamentals. Shrotriya stops short of declaring the current state of affairs a "bubble," though he understands why some investors see it that way.
"[It's] about creating sizzle, about creating an air about something that is bigger than what it is," said Shrotriya, whose own company has traded in the $7 to $11 range in the past year. "They're trying to sell a dream."
Meanwhile, David Thomas, director of industry research at the trade group Biotechnology Industry Organization, flatly states otherwise.
He says the price-to-earnings growth ratios on the sector's biggest stocks are less than one third of where they normally would be when shares are spiking.
"Based on a simple metric like that, we're nowhere near bubble territory," Thomas said.
Welcome to today's confusing, ulcer-inducing world of biotechnology investing.
Investors are doing all they can to maintain their equilibrium in an industry notorious of late for its thrill-a-minute trading sessions. Wild fluctuations in equities are leaving investors groping for air-sickness bags.
Companies like Pharmacyclics Inc. (PCYC), which jumped nearly 20% in one day in early January, climbed a cumulative 50% during the two months that followed and then plummeted back to pre-spike levels within six weeks. The market was agog over a test on a leukemia drug that was halted early because the company had already met all its goals.
Dizzy yet? If not, take a look at Intercept Pharmaceuticals Inc. (ICPT), which catapulted from just above $70 to more than $400 around the same time over a two-day period. Intercept, too, halted tests on a liver drug that met all its goals early.
Intercept has fluctuated between the $300 and $500 level since then but unlike Pharmacyclics, it has kept its high-wire act running.
Even exchange-traded funds and mutual funds — usually the picture of stability — are navigating dizzying heights and white-knuckle dips on a daily basis.
It's almost impossible to find stability in the biotech sector, and that task is made more difficult without a viable roadmap. So the question remains, should investors go along for the ride, or get out at the next stop? Is the latest drop in the sector the sound of a bubble popping, or a little air being let out before the sector goes on another run?
Undoubtedly, the squeamish have got to be at least eyeing the exits after the last few weeks. The Nasdaq Biotechnology Index NB (.NBI) has dropped 17% since hitting a peak in late February, and 14% in the last three weeks alone.
A look at that chart, though, as well as those of the NYSE Arca Biotechnology Index (.BTK), which includes a slew of biotech-heavy ETFs and mutual funds, and just about any viable biotechnology company out there all show the same thing.
Biotech usually isn't the picture of sustained, stable growth, but it's been a top performer along with information technology the last few years.
Prior to 2014, biotech stocks grew steadily, mounting a sustained rally since the recession's downturn. Since the beginning of this year, however, these charts all show a noticeable formation on the right side in which stocks and funds shot up quickly, remained aloft for roughly two months, and then plopped back to a shade above pre-2014 levels.
The movement seems more long term than a spike; perhaps the best way to describe it is sort of an exaggerated muffin top. The next few weeks could indicate whether a crash is inevitable or if the sector simply got too hot in a short time frame and is retreating before it starts another run.
That's what Wall Street seems to think. Analysts collectively seem unfazed by recent movements in biotech, indicating they think recent movements show a little steam being let out.
"People have been calling for a top for over a year now," analyst Christopher Raymond with Baird Equity Research in Chicago said in a recent interview with MarketWatch. "I don't believe it's frothy to the point where we should run. [But] I think there are some flashing yellow lights."
RBC Capital Markets analyst Adnan Butt is similarly optimistic, saying, "Most of the names I cover have room to grow."
In a March 31 note to clients, Maxim Group's Jason Kolbert acknowledges that biotech often is high risk with high reward, but points out the number of drugs being approved by the U.S. Food and Drug Administration is rising — now up to 32 a year over the last three years, compared with its previous annual rate of 24.
"We believe these high numbers may continue over the next few years," Kolbert said.
He added that there is also a significantly higher number of initial public offerings, as well as more merger activity than in years past.
Baird's Raymond points out he was around for what was a true, easy-to-spot biotech bubble in the late 1990s and early 2000s, fueled by the prospect of genome technology that promised to radically alter the drug-making process. At that time, the industry had fewer players that were hyped even more than today, he added.
"They were doing multiples based on the number of PhDs on the staff. Crazy stuff," he said.
Yet last week's action alone could prove troubling for Raymond and others who remain confident biotech's downturn will be short-lived. In a note released late Thursday, he noted that many biotech corrections in the past resulted in a 12% to 15% retreat in shares before climbing again.
"With the [Nasdaq index] now [down] 14% from its late-February peak, this correction feels very normal," Raymond said.
That was before Friday's drop-off, though, which turned it into a 17% plunge. Raymond couldn't be reached for further comment on the share fall.
Jonathan Krinsky, executive director and chief market technician, noted that at the beginning of March, the iShares Nasdaq Biotechnology ETF (IBB) was 30% above a rising 200-day moving average, its best performance in 14 years. He says that kind of extension compares with some indexes of 1929 just before the great stock market crash.
"At some point, you can't keep this rate of ascent at the same pace," he said. Still, he doesn't expect a crash — at this point.
A recent chart from Bespoke Investment Group, however, may prove distressing to the average biotech investor. It compares biotech's five-year rally — using the Nasdaq Biotech index — with that of the late 1990s Internet bubble using the Nasdaq 100 and the real estate bubble of the early 2000s using a homebuilders' index.
The good news for biotech loyalists is that the sector's run-up isn't nearly as intense as the other two. Biotech has climbed less than 400% in that time frame, while the other two neared or exceeded 1,000%. The bad news: Biotech is nearing the same point in time where the other two started to fall, which could mean the sector's rally was never meant to be as robust as those of the other two.
Spectrum Pharma's Shrotriya says there still are plenty of the same old warning signs — strong stock gains with few fundamentals to back them up.
When a company's market cap goes from, say, $200 million to $3 billion in a flash after a successful lab test on an Alzheimer's drug, for example, it raises a number of red flags.
"Some companies have gone through the roof. They haven't demonstrated the revenue." he said. "They haven't demonstrated the staying power."