Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Two Ways to Play: The Biotech Blues


Everyone is watching this volatile sector.

If you think the S&P 500 (INDEXSP:.INX) is in a bubble, then looking at the the biotech sector will make you sick.

The S&P is 181% above its March 2009 low, which sounds impressive -- but compared to biotech, that's nothing!

Over the same time period, the Nasdaq Biotechnology Index (INDEXNASDAQ:NBI) has risen an incredible 316%.

However, a certain question is on everyone's mind, and we can illustrate it with a simple Google (NASDAQ:GOOG) News search:

Everyone wants to know -- is biotech in a bubble?

The sector rose 98% from the start of 2013 to the top on February 25, 2015, at which point the index dropped a quick 12%.

Of course, it didn't help that biotech giant Gilead (NASDAQ:GILD) recently received a letter from Congress inquiring about the price of the company's Sovaldi hepatitis C drug, spurring concerns about price controls.

So is this the beginning of the end for biotech?

Or a mere bump in the road?

From The Bull Pen

Drug price controls are unlikely in the near future.

Medicare and Medicaid can't negotiate drug prices in most cases, and the federal government has no power to simply order the price of Sovaldi lower. 

Additionally, the biotech sector started declining well ahead of the Sovaldi "news," along with other momentum groups like fuel cells, cannabis, and social media.

With no real sign of a deterioration in sector fundamentals, the action looks like profit-taking after a huge rally -- not the end of the world.

One option for the long side is the iShares Nasdaq Biotechnology Index ETF (NASDAQ:IBB), which provides exposure to a wide variety of biotech names, including Amgen (NASDAQ:AMGN), Biogen Idec (NASDAQ:BIIB), and the aforementioned Gilead.

From The Bear Cave
Biotech has had a great run over the past few years. After a 300%+ move in five years, we're in all likelihood way closer to a top than a bottom.

Even with a 12% decline off the top, the sector's still overheated, with stratospheric valuations amid a streak of outperformance that can't last forever.

Additionally, even if Congress really has no power to institute price controls, the risk isn't off the table longer term, and there's no telling how badly that could impact sentiment toward the sector. That means lower valuations and a disruption in the red-hot IPO market.

A high-risk way to profit from an extended biotech slump is to short the SPDR S&P Biotech ETF (NYSEARCA:XBI). Relative to IBB, XBI has greater leverage to smaller, more volatile names. In a broad sector downtrend, that could mean more downside potential.

Also see:

Interview: Biotech Guru David Miller Talks Intercept Pharmaceuticals, the Cannabis Trade, and the Big Bubble Question

Biotech IPOs: Is Investor Optimism Creating a Bubble or a New Market Plateau?

Twitter: @Minyanville

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos