There's Historical Precedence For The Biotech Selloff

There’s no question it has been a rough few months for biotech investors. In a new report, RBC Capital Markets analyst Michael Yee looked at whether the biotech sector has endured similar selloffs in the past.

According to Yee, the biotech sector has dropped below its current forward PE multiple of 14x down to about 13x two times in the past 14 years: during the 2008 Financial Crisis and when President Obama was making changes to the healthcare system.

“So, in our view, today’s valuations already price in a pretty negative outlook and we believe we could be near the trough (perhaps 10 percent or 1 P/E turn and consistent w/ DCF’s around 10 percent to “no pipeline’ levels and there is not a crisis like 2008 and no changes to the HC system at this time),” Yee explained.

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Despite the optimism, Yee acknowledged the difficult environment biotech stocks currently face, including an uncertain election season in which drug pricing has grabbed a lot of headlines. However, RBC anticipates that the election will likely not have any major long-lasting impact on the biotech business and that the current downturn could be a distant memory within a year.

In the past six months, the S&P 500 is down 9.3 percent, but the iShares NASDAQ Biotechnology Index (ETF) IBB has plummeted 28.1 percent.

Disclosure: The author holds no position in the stocks mentioned.