Investors turn sour on US biotech sector
By Michael Mackenzie and Nicole Bullock in New YorkAuthor alerts
Investors have fled US biotechnology shares this month turning fund flows negative for the year to date as the Federal Reserve voiced concerns over high valuations in the sector.
Despite being among the riskiest stocks in the market, biotech has been a boom sector in recent years. Smaller companies on the cutting edge of research and development have attracted significant sponsorship from investors prepared to bet big on a major drug or medical breakthrough. If successful, they hold the potential to generate huge returns, but many fail.
Last week, the US central bank identified biotechs, small-caps and social media shares as a cause for concern, saying valuations “appear to be stretched”.
That triggered a slide of some 6 per cent in the Nasdaq biotechnology index, wiping nearly $40bn from the market’s value, before prices rebounded 3 per cent on Friday.
So far this year, the index is up 10.6 per cent and remains 16 per cent above its low in April, when a valuation scare previously shook the sector.
Investors were pulling money out of the sector before the Fed issued its warning, with the main exchange traded fund tracking the Nasdaq biotechnology index seeing $326m leave over the past week, according to ETF.com.
Since the start of July, outflows from the iShares Nasdaq Biotechnology ETF, known as IBB, have reached $445m, for a net decline of $77m this year. That comes after an inflow of $747m during 2013 when the biotech index surged 65 per cent.