Disclosure: I own shares of AMGN and GILD
Biotechnology stocks have been in a sharp correction this week. The iShares Nasdaq Biotechnology ETF dropped close to one-percent in early Thursday trade, following a 1.89% decline on Wednesday; and the SPDR S&P biotech ETF registered similar losses.
Is the correction a buying opportunity or a wake up call?
On the one side, the correction is a buying opportunity for biotech companies with sound fundamentals. That is, companies which have a broad portfolio of products that have pasted both the lab test and the market test, and delivered the “milk,” ie profits on Wall Street.
Gilead Sciences is one of these companies, which has close to $25 billions in revenues and trades at a forward PE of less than 10. Amgen and Regeneron Pharmaceuticals have solid revenues, though they trade at higher–but reasonable for a fast growing sector–PEs.
That’s how biotechnology investing has turned into a hot theme in the mass and social media.
*Fye Dec 31, 2016
On the other side, the correction is a wake up call for companies with shaky fundamentals. That is, companies which have reached a market valuation of many billions of dollars, though they have little or no product revenues.
Puma Biotechnology, for instance, has a market capitalization north of $7 billion, though it has no revenue. Intercept Pharmaceuticals has a Market cap to revenue ratio of 372.41, and Isis Pharmaceuticals has somewhat better ratios.
That’s why I would rather stay with the first sector rather than chase after the second sector.