From 2009 to the middle of 2015, biotechs were one of the strongest sectors in the market. Over this period, the iShares Nasdaq Biotechnology ETF
Biotech's Base
However, at its peak in August 2015, there was considerable froth in the sector. The largest companies had a triple-digit price to earnings ratios. IPOs were seeing massive gains on the first day of trading even if they had tenuous prospects. These types of situations can resolve in two ways. The ugly way is through a severe crash or bear market. The more constructive way is an extended period of sideways trading.
Biotechs went down the latter path. Following its bull market, the sector traded sideways for five years. During this time period, the biggest companies in the sector grew sales and earnings to achieve reasonable valuations. And, many of the more speculative names sold-off.
Now, the sector has a cheaper valuation than the S&P 500, while having a better growth rate and more potential. This is the recipe for another leg higher for the sector as growth and value investors will be able to justify investing in the sector. This type of sideways price action also leads shares to transfer from "weak" hands to strong hands.
Biotech's Massive Potential
Beyond valuation and technicals, there are additional reasons to like the sector. The coronavirus is going to lead to countries increasing investment in healthcare. Some of this will certainly flow into the sector.
Another reason to be bullish on biotechs is that the pipeline for pharmaceutical companies is pretty barren. They are going to have to buy companies or partner with companies for the next-generation of blockbuster treatments. Advances in biotech have significantly brought down the cost of developing drugs. A decade ago, drug-development was quite expensive with little idea of success until clinical trials. Now, due to advances in genomics and computer modeling, companies can develop drugs with a much better chance of success.
The recent successful vaccines from Pfizer
This is just the tipping point for what future innovations will bring. Some examples are editing the DNA of bacteria or viruses to render them impotent, fixing genetic defects in humans to prevent or cure diseases, developing personalized medicines based on one's genetic profile, and achieving quicker and more accurate diagnoses with non-invasive methods.
These types of innovations will be positive for humanity and also create tremendous shareholder value for companies. The last decade has taught investors that finding companies, involved in disruptive innovations, are ultimately the big winners. It's likely that many of these companies will be in the biotech sector.
