Biotech slump is buying opportunity

published 18 April 2014

Biotechnology stocks are in a bear market. The Nasdaq Biotech index (NBI) has plunged by more than 20% since its record high in February.

In April, of the index's 121 stocks, only half a dozen or so "have managed to hold their heads above water", say Rodrigo Campos and Caroline Valetkevitch on Reuters.com. It's part of a wider trend.

"Investors are dumping what did well last year, and buying the stuff that did badly," notes the FT's James Mackintosh. Old' technology stocks, classic pharmaceuticals and emerging market shares are starting to come back into fashion in what "looks very much like a bout of profit-taking".

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This does not mean biotech is doomed. The slump in stock prices actually helps the industry over the long term, says Steven Syre in The Boston Globe.

"A biotech stock collapse from even greater heights could have shut off public funding to promising new companies and for a long time limited the ability of established biotechs to grow."

The price/earnings growth (PEG) ratio suggests that biotech shares are even starting to look decent value. Generally, stocks with a PEG of below one are seen as being cheap.

More than 20 Nasdaq biotech components, including Biogen Idec (BIIB) and Gilead Sciences (GILD), now trade on PEG ratios of below one.

If you're interested in buying into the sector, The International Biotech Trust (LSE: IBT), which counts Biogen and Gilead as its top stock picks, trades on a 20% discount to its net asset value. The Biotech Growth Trust (LSE: BIOG) is on a discount of 6.7%.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.