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Is This the Right Time to Invest in Biotech Stocks?
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The biotech industry was once a Wall Street favorite chalking up impressive gains until 2015 when the drug pricing issue started weighing on the sector. However, a look at the industry’s year-to-date (YTD) price performance indicates that the sector is showing signs of recovery. But, will the rally continue and is this the right time to put your money in this corner of the market?
To get a better idea about this, here is a look at the sector’s performance over the last five years.
The price performance chart during this period shows that the sector gained 56.8% compared to the S&P 500 gain of 76.4%. While the sector had a stupendous run between 2012 and a major part of 2015, this came to an end with increasing political, media and public focus on the rising prices of drugs. Hillary Clinton’s “price gouging” tweets kept investors wary and cautious about investing in this sector on concerns that steps would be taken to limit drug price hikes which in turn would hit the financials of companies especially those with high-priced drugs. As a result, 2016 ended up being a dismal year for biotech stocks with big companies like Biogen Inc. (BIIB - Free Report) , Gilead Sciences, Inc. (GILD - Free Report) , and Alexion Pharmaceuticals, Inc. feeling the impact of the drug pricing controversy.
However, all that changed post Nov 8, 2016 when biotech stocks got a shot in the arm with the surprise win of Donald Trump on hopes that the drug pricing issue would not be a key priority for a non-Clinton administration. The relief rally turned out to be short-lived with President Trump making it clear that he does not like price increases.
But the sector rebounded in 2017 and is on a roll since the beginning of the year with the industry gaining 10.3%, outperforming the market which is up 6.3% YTD.
Going by the current price-to-earnings multiple, which is often used to value drug stocks, the biotech sector is currently trading at a P/E multiple of 33.56, well above the S&P 500 P/E multiple of 18.47. Now that looks expensive but if you see the valuation history for the last 5 years, there is still some room for upside given the industry’s 5-year high of 35.60.
So what are the factors that could drive the sector? First and foremost, this is an industry that will continue to witness demand for its products given an aging population and the increasing prevalence of a wide variety of diseases. Strong pipelines, innovative treatments, impressive results, and increased health care spending should support growth. Trump's pro-business stand is also expected to benefit the sector. Major biotech companies should gain from Trump's proposed tax plan and proposal to repatriate corporate profits held offshore at a one-time tax rate.
A faster drug approval process and the proposed removal of outdated regulations that drive up costs and slow down innovation should also work in favor of this sector.
On the flip side, drug pricing will remain a headline risk. The estimate revision trend for the sector is also not very encouraging. The growing presence of biosimilars, a slowdown in growth of legacy products and high profile pipeline setbacks are also challenges for the sector.
The bottom-line is that although biotech stocks are definitely not cheap at current levels, there is still some room for upside. Moreover, 2017 is expected to be a catalyst rich year for the sector with several major pipeline events lined up. Favorably ranked biotech stocks include companies like Celgene Corporation -- you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Is This the Right Time to Invest in Biotech Stocks?
The biotech industry was once a Wall Street favorite chalking up impressive gains until 2015 when the drug pricing issue started weighing on the sector. However, a look at the industry’s year-to-date (YTD) price performance indicates that the sector is showing signs of recovery. But, will the rally continue and is this the right time to put your money in this corner of the market?
To get a better idea about this, here is a look at the sector’s performance over the last five years.
The price performance chart during this period shows that the sector gained 56.8% compared to the S&P 500 gain of 76.4%. While the sector had a stupendous run between 2012 and a major part of 2015, this came to an end with increasing political, media and public focus on the rising prices of drugs. Hillary Clinton’s “price gouging” tweets kept investors wary and cautious about investing in this sector on concerns that steps would be taken to limit drug price hikes which in turn would hit the financials of companies especially those with high-priced drugs. As a result, 2016 ended up being a dismal year for biotech stocks with big companies like Biogen Inc. (BIIB - Free Report) , Gilead Sciences, Inc. (GILD - Free Report) , and Alexion Pharmaceuticals, Inc. feeling the impact of the drug pricing controversy.
However, all that changed post Nov 8, 2016 when biotech stocks got a shot in the arm with the surprise win of Donald Trump on hopes that the drug pricing issue would not be a key priority for a non-Clinton administration. The relief rally turned out to be short-lived with President Trump making it clear that he does not like price increases.
But the sector rebounded in 2017 and is on a roll since the beginning of the year with the industry gaining 10.3%, outperforming the market which is up 6.3% YTD.
Going by the current price-to-earnings multiple, which is often used to value drug stocks, the biotech sector is currently trading at a P/E multiple of 33.56, well above the S&P 500 P/E multiple of 18.47. Now that looks expensive but if you see the valuation history for the last 5 years, there is still some room for upside given the industry’s 5-year high of 35.60.
So what are the factors that could drive the sector? First and foremost, this is an industry that will continue to witness demand for its products given an aging population and the increasing prevalence of a wide variety of diseases. Strong pipelines, innovative treatments, impressive results, and increased health care spending should support growth. Trump's pro-business stand is also expected to benefit the sector. Major biotech companies should gain from Trump's proposed tax plan and proposal to repatriate corporate profits held offshore at a one-time tax rate.
A faster drug approval process and the proposed removal of outdated regulations that drive up costs and slow down innovation should also work in favor of this sector.
On the flip side, drug pricing will remain a headline risk. The estimate revision trend for the sector is also not very encouraging. The growing presence of biosimilars, a slowdown in growth of legacy products and high profile pipeline setbacks are also challenges for the sector.
The bottom-line is that although biotech stocks are definitely not cheap at current levels, there is still some room for upside. Moreover, 2017 is expected to be a catalyst rich year for the sector with several major pipeline events lined up. Favorably ranked biotech stocks include companies like Celgene Corporation -- you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
8 Stocks with Huge Profit Potential
Just released: Driverless Cars: Your Roadmap to Mega-Profits Today. In this latest Special Report, Zacks’ Aggressive Growth Strategist Brian Bolan explores a full-blown technological breakthrough in the making – autonomous cars. He also spotlights 8 stocks with tremendous gain potential to feed off this phenomenon. Click to see the stocks right now >>