Biotech investors must have strong stomachs. Nowadays they really have to have cast iron ones given the sector's volatility.
Thursday offered yet another example. The Nasdaq Biotechnology Index dropped more than 5% in morning trading. It managed to claw some of that back later in the day. Even so, the index is now off by more than 20% this month alone.
Disappointing news explains part of Thursday's decline. Vertex Pharmaceuticals, for instance, said Wednesday that it was uncomfortable with analyst consensus revenue projections. Additionally, Incyte announced Wednesday that it had halted a Phase 2 clinical trial for colorectal cancer due to lack of efficacy.
Given that biotech stocks tend to derive much of their value from the prospect of future riches, as opposed to profit and revenue today, a clouded outlook is particularly jarring.
Alarmingly for the sector, Thursday's turbulence wasn't accompanied by a decline in the broader equity markets. Stocks of all kinds have done poorly this year, but the Nasdaq 100 has outperformed biotech by 12 percentage points in January. That is a change from recent years, when biotech stocks topped a strong market.
And the biotech index is now firmly in bear-market territory, down more than 30% from its peak last summer. Price declines are bound to let up at some point, of course. However, investors should also bear in mind that the index more than doubled between end of 2012 and the start of 2015.
That run came against a backdrop of stock investors essentially acquiescing to the Federal Reserve's zero-interest- rate policies. They went all in to stocks and biotech was one of the chief beneficiaries.
With the Fed now turning course, biotech stocks may have a long, uncomfortable journey ahead of them.