The biotech industry was once a Wall Street favorite chalking up impressive gains until 2015 when the drug pricing issue started weighing on the sector. However, a look at the industry’s year-to-date (YTD) price performance indicates that the sector is showing signs of recovery. But, will the rally continue and is this the right time to put your money in this corner of the market?
To get a better idea about this, here is a look at the sector’s performance over the last five years.
The price performance chart during this period shows that the sector gained 56.8% compared to the S&P 500 gain of 76.4%. While the sector had a stupendous run between 2012 and a major part of 2015, this came to an end with increasing political, media and public focus on the rising prices of drugs. Hillary Clinton’s “price gouging” tweets kept investors wary and cautious about investing in this sector on concerns that steps would be taken to limit drug price hikes which in turn would hit the financials of companies especially those with high-priced drugs. As a result, 2016 ended up being a dismal year for biotech stocks with big companies like Biogen Inc. (BIIB – Free Report) , Gilead Sciences, Inc. (GILD – Free Report) , and Alexion Pharmaceuticals, Inc. (ALXN – Free Report) feeling the impact of the drug pricing controversy.
However, all that changed post Nov 8, 2016 when biotech stocks got a shot in the arm with the surprise win of Donald Trump on hopes that the drug pricing issue would not be a key priority for a non-Clinton administration. The relief rally turned out to be short-lived with President Trump making it clear that he does not like price increases.
But the sector rebounded in 2017 and is on a roll since the beginning of the year with the industry gaining 10.3%, outperforming the market which is up 6.3% YTD.
Going by the current price-to-earnings multiple, which is often used to value drug stocks, the biotech sector is currently trading at a P/E multiple of 33.56, well above the S&P 500 P/E multiple of 18.47. Now that looks expensive but if you see the valuation history for the last 5 years, there is still some room for upside given the industry’s 5-year high of 35.60.
