ETF: Is the biotechnology bubble bursting?

By: Anton Aleksandrov
Anton Aleksandrov
Anton is a freshly graduated economist from the States with passion for the world of finance. He is one… read more.
on Apr 9, 2014
Updated: Oct 21, 2019

iNVEZZ.com Wednesday, April 9: Biotech stocks have seen significant falls over the last month, dragged down by fears of a bubble and disappointing announcements. The shares have also been hit by a Congressional inquiry into Gilead Science’s pricing practices. Since March 10, the SPDR S&P Biotech exchange traded fund (NYSEArca:XBI) has lost 16.93 percent, the First Trust NYSEARCA Biotechnology Index ETF (NYSEArca:FBT) has dropped 11.68 percent, the iShares Biotechnology Index ETF (NASDAQ:IBB) has declined 3.78 percent and the Market Vectors Biotech ETF (NYSEArca:BBH) has plunged 7.9 percent.

Last Friday XBI saw the biggest withdrawal since its inception, with $372 million (₤222 million) or 7.5 percent of the ETF’s $4.98 billion (₤2.97 billion) in assets leaving the biotech-focused fund. According to Sanford C. Bernstein analyst Geoffrey Porges, the long-time bullish run for the sector was over: “We consider the sector’s run-up, which has been remarkable, to be getting into its very final innings.” There are other pessimists in the market, with 15 percent of the shares outstanding in IBB being short positions, meaning investors are betting their price will fall.

Proponents of a bullish market argue that biotech stocks will bounce back, basing their assumption on technical patterns, investor behaviour and takeover interest. Credit Suisse analysts compare the 1999/2000 biotech bubble and the 2013/2014 environment, noting that certain similarities exist such as the overabundance of early-stage companies, but adding that today the business model for these firms is significantly different. New-generation platform technology companies are now trying to bring products to the market as opposed to simply selling tools and services.

Paul Weisbruch, vice president at Street One Financial, has argued that the drop in prices was largely due to profit taking near the end of the first quarter. “It’s a reflection of, probably, end of the quarter selling of the winners if you will, because biotechs have done really well,” he told Bloomberg in a telephone interview.

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The performance of biotech shares are largely dependent on the outcome of drug trials and approvals from the Food and Drug Administration (FDA). This makes the shares highly volatile. Last Friday, Halozyme Therapeutics saw its stock plunge by 27.26 percent after the company announced it would temporarily suspend enrolment in an ongoing Phase 2 trial for one of its drugs. This triggered a momentum effect, with shares of OncoMed Pharmaceuticals, Regado Biosciences and several other biotech stocks falling as well.

**As of 09.15 BST buy SPDR S&P Biotech ETF at $133.63**
**As of 09.15 BST sell SPDR S&P Biotech ETF at $133.61.**
**As of 09.15 BST buy First Trust NYSEARCA Biotechnology Index ETF at $73.89.**
**As of 09.15 BST sell First Trust NYSEARCA Biotechnology Index ETF at $73.87.**
**As of 09.15 BST buy iShares Biotechnology Index ETF at $225.84.**
**As of 09.15 BST sell iShares Biotechnology Index ETF at $225.82.**
**As of 09.15 BST buy Market Vectors Biotech ETF at $86.73.**
**As of 09.15 BST sell Market Vectors Biotech ETF at $86.71.**

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