The Biotech sector is still rising and, for the most part, going unnoticed. The popular “talking heads” are too focused on scaring viewers with headlines of European defaults, failed bank stress tests, and the collapse of Facebook’s stock price.
A few weeks ago I posted about the potential of this sector and was invited to the George Jarkesy Show to speak in more detail about the sector.
Some key highlights:
The biotech sector has seen consistent growth over the past ten years as compared to the negative growth in the overall private sector here in the US. (6.4% between 2001-2010 compared to a 2.9% decline in overall U.S. private-sector jobs). In fact, this year alone twenty-two new biotech drugs have been approved, including promising new drugs for breast cancer and obesity.
In addition the baby boomer generation is aging and they are the largest portion of the US population. The payoffs are tremendous in the biotech industry right now.
This industry push has resulted not only in numerous scientific breakthroughs but we are stating to see much faster FDA approval of new therapeutic drugs, especially in the cancer field.
However, the Biotech sector has not been getting a lot of attention during the past decade as the media has been focused on oil prices, the Facebook IPO, and Europe. So the sector is not yet overbought or over hyped yet and still has room to continue to grow.
In fact hedge funds and mutual funds are quietly becoming very active in biotech. Companies like Fidelity and Vanguard are bigger players than ever in biotech.
Funds have began to focus more on the industry as it has matured – numerous biotech companies have more late stage clinical products than ever before. This is important since large cap drug companies like Pfizer and Merck are starting to restructure as their high most successful patents begin to expire, which of course then allows their “blockbuster drugs” to be sold as a cheaper generic.
As a result they are on the hunt for acquisitions and we are starting to see a lot more mergers and acquisition activity lately.
Lastly, available capital for new startup companies is a lot less than it was back in the 90′s. Venture capital and angel investments have put their focus on the technology sector and mostly have ignored biotechs over the past 7 years. This means there are less biotech companies that can be bought out by larger pharmaceutical companies, which will create a “rush to buy” and cause prices of biotech companies to rise.
Biotechs Are Still Trending Upward
Despite the recent stock market volatility and all the daily “fear” stories from the media, the sector has been trending upward quite nicely:
The Presidential Cycle
And don’t forget this is an election year, and so far this year’s trading pattern has mirrored the historical Presidential Cycle’s pattern:
For those not familiar with the Presidential cycle and how it relates to this year’s stock market, the theory basically states that the fourth year of a President’s term will provide above average returns in the stock market. (Regardless of who wins the election this year, the economy will be the main focus of the campaign. This is good news for the markets, as investors tend to get more positive as new ideas are presented on how to fix the system).
So keep an eye on the Biotech sector as, in addition to the Presidential Cycle, I am starting to see more and more buy signals for the US stock market in the models I track. Portfolio managers who sitting on cash and looking to put money to work will be seeking out the strongest sectors.
Thanks for reading – John