Biotech stocks, which have fallen 20% from last year's high based on the iShares Nasdaq Biotechnology ETF (IBB), could face more declines in the year ahead. A combination of negative headwinds including weak sales growth, earnings revisions and other forces are likely to plague the once-red hot sector. Stocks such as BioMarin Pharmaceutical Inc. (BMRN), Ultragenyx Pharmaceutical Inc. (RARE), and Vertex Pharmaceuticals Inc. (VRTX) are especially vulnerable, according to Raymond James’s Laura Chico, per a detailed story in Barron’s. The chart below shows how badly this group has performed.

Biotechs Are Ailing

  • BioMarin Pharmaceutical (BMRN): -20% from 52-week high
  • Nasdaq Biotechnology ETF (IBB): - 20%
  • Ultragenyx Pharmaceutical (RARE): -55%
  • Vertex Pharmaceuticals (VRTX): -15%

Why Investors Should Care

To be sure, many biotech stocks surged in a down market on Thursday on news that Celgene Corp. (CELG) received a $74 billion takeover bid from Bristol-Myers Squibb Co. (BMY). But it's unclear whether that will be enough to lift many of these names longterm. As investors started to ditch technology in 2018, circling back to safer names in healthcare, many pharmaceutical companies were left out of the rally. Market giants such as Merck & Co. (MRK) and Pfizer Inc. (PFE) outperformed the Dow Jones Industrial Average (DJIA) index last year, but the broader biotech sector, led by companies including Biogen Inc. (BIIB), Gilead Sciences Inc. (GILD) and others suffered from concern about drug-price regulation and a preference for more defensive names in the sector.

While biotech stocks are undeniably cheap after last year’s downdraft, Bernstein’s Arron (Ronny) Gal points out that “valuation is insufficient when earning revisions and/or news flows are negative,” per Barron’s. Chico adds, “simply put, it's hard to see the group as a compelling buy particularly for names with legacy products still comprising a significant proportion of revenue.” With growth prospects hindered, Chico downgraded BioMarin, Ultragenyx, and Vertex to market perform. While she is generally cautious, Chico is upbeat on firms including Sage Therapeutics Inc. (SAGE) and Alexion Pharmaceuticals Inc. (ALXN). Also, Gal has outperform ratings on Mylan NV (MYL), Allergan plc (AGN) and Celgene.

The Upside

Downside drivers aside, there remain positive forces that could fuel biotech, including a strong likelihood of the group beating current expectations, notes Gal. He adds that pressure from Washington regarding drug pricing shouldn’t effect the sector in the near-term. Chico is positive on access to capital markets for R&D spending, as well as the Food and Drug Administration’s actions to approve new drugs.

Looking To The Future

The prospect of takeovers like Celgene may turn some of these biotechs into big profits for investors. But, overall, biotech stocks have long disappointed investors banking on a sector turnaround which never materialized. Despite cheap valuations, a myriad of risks facing the sector should make it particularly hard for biotechs to outperform in a bearish market, requiring investors to be picky when choosing stocks.