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Biotech Stocks Face Shaky But Strong Start To 2014

Despite volatility, shares performed well in the first half, and stock offerings boomed

by Ann M. Thayer
July 14, 2014 | A version of this story appeared in Volume 92, Issue 28

Biotechnology stocks took investors on a wild ride in the first half of 2014, only to return safely up. As is often the case in the volatile sector, the drivers behind the ups and downs were not always obvious.

Biotech stocks have recovered from a first-quarter dive.
Graph showing dip and rise of biotech stocks over the first half of 2014
Biotech stocks have recovered from a first-quarter dive.

As a group, biotech company stocks were fast out of the gate this year, as seen in a 10% rise in the NASDAQ biotech stock market index in the first two weeks of January. By mid-February, the biotech index was up nearly 20% from the start of the year and at an all-time high. The sector was riding on overall strong revenue growth, product successes, and a generally favorable investment climate, according to a report on the industry recently published by Ernst & Young.

Taking advantage of this, biotech companies began launching initial public offerings (IPOs) of stock. In the first six weeks of the year, 16 life sciences companies held IPOs. By the end of the first quarter, 24 had raised a combined $1.74 billion, according to Thomson Reuters and the National Venture Capital Association.

The rash of IPOs occurred despite the fact that biotech stock prices started heading south in March and hit a trough in early April, down about 5% from the beginning of the year. Congressional inquiries into the high prices of some drugs, such as Gilead Sciences’ Sovaldi, caused concern among investors about the impact on sales, but other reasons for the decline weren’t very clear.

And just as quickly as the earlier boom had come, talk of a bust in biotech stocks began. At the time, some analysts suggested that jittery “generalist investors,” who buy into the excitement around a sector, were cashing out. In contrast, specialists invest in the stocks of specific companies on the basis of their performance or promise.

Despite their March decline, biotech stocks still generally outperformed the broader stock market, which was also down for the year through April. And, almost immediately after hitting their low point in April, biotech stock prices turned around and began to climb again. As a result, another 16 life sciences firms held IPOs in the second quarter and raised $1.24 billion, making the number of first-half IPOs more than twice that seen in the same period in 2013.

The NASDAQ biotech stock index continued to perform well in June to reach the half-year point about 14% higher than its January start. In the second quarter, the health care sector also outperformed all others in its returns on IPO prices, according to the investment analysis firm Renaissance Capital. Several more biotechs have IPOs scheduled in the coming weeks.

Interest in biotech stocks isn’t showing signs of falling off, said Mark Schoenebaum, a biotech and pharmaceuticals analyst with New York City-based ISI Group, in a late-June webcast. “There is a sense of stability now,” he concluded, with many generalists and other “frothy elements” gone from the market.


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