With the biotechnology sector experiencing strong overall performance in recent years, a recent selloff—albeit a mild one—has raised some concerns about the duration of this correction and the health of the sector.
Clearly, there are number of short-term reasons for the recent correction. Many companies had been trading at high valuation levels by historical standards, and there were near-record levels of initial public offerings and secondaries. In addition, speculation in earlier-stage and lesser-quality names had created greater near-term risk. Markets were unnerved by a letter from the US House of Representatives questioning the price of a new high-profile breakthrough drug, which raised the specter of price controls. All of these factors were then magnified by sector rotation away from high-growth names.
But we don’t view this as the end of a growth cycle for the biotechnology sector, or even another example of a typical “boom-and-bust” market. Instead, we believe we are witnessing a healthy correction that will provide significant long-term investment opportunities.
Our stock selection conviction is based on close analysis of underlying drivers. Unlike in past cycles, the sector’s recent strength has been driven not by profit-less technology platforms but by new therapeutic introductions resulting in significant revenues and earnings. Most importantly, we are witnessing ongoing innovation in the sector, with robust product pipelines addressing oncology, neurological disorders, infectious diseases and metabolic disorders.
As a result, we believe revenue and earnings growth rates for biotechnology companies should continue to outpace those of the broader market, driving biotechnology stock prices higher. Investors could use the correction as a buying opportunity, with many companies now trading in line with the market using a forward price-to-earnings metric.
We remain positive on the long-term potential of the biotechnology sector and believe that patient investors who use a disciplined investment process can outperform the broader market. Our investment process will continue to focus on companies with significant and innovative new therapeutics, which we believe will drive long-term earnings growth and ultimately share prices.