Well the BTK vs. DRG index ratio is now back to close to unity - a level not seen since the beginning of the year. (It peaked at 2.6 on March 7). Since the beginning of the year, the two indices have essentially moved inversely, with the drugs bottoming on March 7 as the biotechs peaked.
Looked at in isolation, this would be a somewhat strange phenomenon to justify rationally. A change in the discount rate for future earnings (valuing distant earnings less) together with a change in current multiples (valuing current earnings more) would do it.
Support for this explanation comes from graphing the Nasdaq Composite index vs. the DOW. This graph for the period since the beginning of the year turns out to have a remarkably similar shape, although the BTK/DRG graph is much steeper (on both the rise and decline), and peaked a few days earlier. (The COMPX/DOW graph peaked at around .5 and is now around .3)
For several years the biotechs kind of did their own thing in isolation from the overall market (they were in fact consigned to the dreaded "no liquidity" pigeonhole). This year they have been a bellwether for the overall markets - a paradigm of the "new economy" vs. the "old economy."
Frustratingly for prognosticators, there has been remarkably little in the way of concrete events that have shaped this huge up and down surge. Instead, it has truly been a herd stampeding up one side of a mountain and down the other side. (Notice that the biotechs/drug ratio peaked a week or so before the Clinton/Blair genome debacle.)
Bottom lines here: It just feels like they're picking on biotech - in fact we've been part of a bigger phenomenon. The strength in the drug stocks has ultimately to be a good thing for biotechs, as does the capital that poured into the biotech sector before the fall.
Looking forward, one medium term bearish factor is that none of AMGN, BGEN or GENZ currently seems destined to lead us into the promised land. I've placed my own bets on SEPR and MLNM to eventually play this role, but the best news from them is still a few years off.
Peter |
