US biotech stocks soar to new record high

Investors are buying further into booming US biotechnology stocks, with the sector soaring to a new record after delivering double-digit returns in 2014.

In a year when the wider New York S&P 500 index remains in negative territory, the Nasdaq biotechnology sector has built on its 65 per cent return last year with gains of 12.3 per cent from the start of 2014 to reach a new high.

Investors’ money has continued to pour into the sector, with the main exchange traded fund tracking the Nasdaq biotechnology index having attracted $329m, just under half of last year’s total inflow of $747m.

The new money has come even as investors have pulled around $37.5bn out of the largest US equity ETFs so far this year, according to ETF.com.

“It’s no surprise that dream stocks continue to do well,” said Vadim Zlotnikov, chief market strategist at AllianceBernstein.

He said investors looking to take on more risk were not seeing performance from technology stocks and industrials. Instead, they were looking at the more aggressive growth expectations among biotechs.

Leading the index is Newlink Genetics, with a gain of 90 per cent, and 53 members of the index are up more than 13 per cent so far this year. However, some 33 members of the index have recorded a negative performance so far this year, which analysts cited as evidence that investors were staying rational about the sector.

Biotechs are well-known for being among the riskiest investments, and especially in smaller companies, which are attempting to push prospective medical breakthroughs through clinical trials. If successful, they hold the potential to generate huge returns, but many fail.

Concerns over biotech frothiness have mounted with the pace of new listings, which is being driven by companies that are often in early or even pre-clinical trials. After 40 companies listed new stock offerings last year, 16 biotech companies have already come to market this year and dozens more are in the pipeline, bankers say.

Ravi Mehrotra, analyst at Credit Suisse, said: “This feels like a bubble looking at the performance and looking at the money coming into the sector, but there are real reasons why this is happening. Revenue success in any industry garners market success and biotechs have seen that from its large-cap companies.”

Mr Mehrotra cites the success of new drugs acquired by big biotechnology companies such as Celgene, Biogen and Gilead Sciences in boosting their sales and net profits, further fuelling interest in the sector.

Still, the rapid pace of share price gains has sparked concerns that biotech stocks are overheating. Mark Schoenebaum, senior biotechnology and pharmaceutical analyst at ISI, said: “You can definitely make the argument that biotechs no longer look cheap, but it’s difficult to argue they look horrifically expensive.”

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