It wasn’t that long ago that investors couldn’t get enough of biotechnology stocks. Now it seems like they can’t get out of the sector fast enough.
The NASDAQ biotech index has dropped about 17% in the first two weeks of 2016. This comes after it more than doubled in the previous three years during an investment boom that saw record IPO and venture-capital investment volume and a surge in takeovers.
A key part of this is the broad-market decline. When investors are selling everything, relatively risky investments will drop further and faster, explained Bryan Roberts, a biotech investor and partner at venture-capital firm Venrock.
“Investors get skittish when they see risk assets showing signs of deterioration,” he told Business Insider. “And biotech is absolutely a risk asset.”
In other words, this doesn’t speak to some kind of breakdown in the prospects for biotech companies or drug development — which can take as long as a decade and cost upwards of $1 billion.
But it is a reminder that investors who made a bundle betting on the sector in recent years were also riding a wave of risk-taking across the board.
“None of us were as smart as we thought we were for the last three years,” Roberts, who has invested in the sector for 18 years, said.
There are some factors specific to the biotech sector that may be weighing as well. It was a letdown, for example, that there wasn’t much in the way of big news at the JP Morgan Healthcare Conference. The annual event is typically a great time for the industry and in past years its been loaded with news that spurred stock gains.
(True, there was a massive takeover struck at the start of the event — Shire’s $32 billion takeover of Baxalta — but it had publicly been in the works for nearly 6 months by the time it was announced.)
The timing of the market selloff is particularly bad news for one group of companies. Like in 2015, the JPMorgan conference was preceded by a wave of filings for initial public offerings and follow-on share sales.
The companies begin the IPO process right before the conference so that they’re set up to put a price on their shares by the end of January, Roberts said.
“But what nobody could predict was the downdraft in the market,” he said. “They all flipped confidential before you knew what the market was doing that Monday. And as you will note, no one has flipped to a public filing since.”
Investors already had reason to be wary of biotech IPOs. Half of last year’s IPOs — in which companies raised more than $5 billion — were flops as far as share performance is concerned, according to Bloomberg’s Zachary Tracer.
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