Biotech Stocks: What Could Spoil The Rally In 2015?
Biotech stocks put on a big rally in 2014, outperforming the overall market. The iSharesNasdaq Biotechnology (IBB) have reached close to 30% for the year in contrast to a 12.5% increase for the S&P500 and 14% increase for the NASDAQ market.
The low interest rate environment and a line of new drug approvals have been moving the biotechnology rally.
Will the rally still go in 2015?
We are not able say for certain. What we can determine is that certain favorable factors will provide tailwind for biotechnology stocks. At the same time, the industry will approach two threats that possibly could end up slowing down or even derailing the rally.
First is a strong US economy — GDP is expanding at 5%, according to the latest government information. Which may force the Federal Reserve to raise interest rates sooner rather than later. And that could present an issue for the sector, as it will show an end to cheap margin-borrowed money, which has been propelling shares of some revenue less biotech companies into the stratosphere.
Then comes approval of new drugs, which promotes competition for big times drugs – which is expected to undermine pricing influence and profitability in the within the Biotech industry.
Gilead, for instance, controls a 58.37% operating margin!
AbbVie’s all-oral treatment for hepatitis C, which reached FDA approval last week, is a case in point. AbbVie’s new drug would priced at about $83,319 for a normal 12-week plan, a bit below its major selling competitor Sovaldi from Gilead Sciences.
However, AbbVie’s gains were tapered, and eventually ended up as a loss, as competition ultimately effect both companies.
While biotechnology will proceed to provide new treatments that save lives and enrich investors who finance the development of these treatments, the industry cannot run from the macroeconomic and microeconomic ways of business that make the dollars to riches past bumpy, to say the least. The excitement should never be replaced for due diligence.