The experts who considered biotech valuations were stretched last summer would be wondering how to analyze the valuations now. The Nasdaq Biotech index surged more than 40% since the Federal Reserve warned the market on biotech valuations. Investors who followed warnings of the Board of Governors and Fed Chair Janet Yellen and sold their biotech holdings will be regretting now as the sector posted hefty gains in past few months.
In July, The Federal Reserve mentioned in its monetary policy that the valuation metrics in some sectors are substantially stretched. It is particularly applicable for smaller firms operational in the biotechnology and social media sectors. The valuations appear stretched despite significant downturn in equity prices early in the year.
In addition, implied volatility of the key S&P 500 index has fallen in recent months to low levels that were last seen in the mid-1990s and mid-2000s. It is evident that market sentiment improved during this time. The Fed warning didn’t affected sentiment of investors in the Biotech sector as since then the sector has posted strong gains.
The Fed clearly warned about a potential bubble associated with biotech industry. The fears have continued to increase along with the biotech index. The biotech firms have outpaced internet companies on NASDAQ platform in recent years. The divergence has significantly grown in past one year.
The biotech sector is in focus since Friday after Biogen Idec Inc (NASDAQ:BIIB) stock jumped more than 10% in last trading session. The company released an update on its Alzheimer’s drug candidate, popularly known as aducanumab. The interim results of an early stage trial revealed that aducanumab significantly reduced amyloid plaque levels.
If Biogen succeeds in its trials it can be a major achievement, as more than 10 million people globally and 5 million people in the U.S. are afflicted with Alzheimer.