Since this current bull market began in March 2009, one of the leading sectors has been biotech stocks (Nasdaq: IBB). Economic and financial conditions have been ideal, and there has been an abundance of technological developments that have lowered the cost of drug development and allowed new treatments to develop. It's also a response to an aging population with rapidly rising medical costs that are seeking effective treatments to extend lifespans and improve the quality of life.
In a world with low secular growth rates, there's going to be a strong demand for the few high-growth opportunities. This dynamic is exacerbated in a low-interest-rate environment, where the central bank is essentially encouraging risk-taking. This circumstance has prevailed for the bulk of this bull market and contributed to the expansion of multiples in biotech stocks.
However, these stocks have also grown earnings by an impressive amount, fulfilling the optimistic expectations of investors who bought in when these had negative earnings and sales multiples in the triple digits. From March 2009 to mid-2015, biotech stocks led the market higher due to these factors. Since then, they have basically consolidated in a sideways range.
Next Catalyst
One potential catalyst for the next move higher in the sector is recent advances in gene editing and CRISPR which holds the potential to treat genetic diseases. The current leader is CRISPR Therapeutics (Nasdaq: CRSP) which is the first company to begin human trials. Two more stocks in the sector are Editas Medicine (Nasdaq: EDIT) and Intellia Therapeutics (Nasdaq: NTLA).
All three stocks have followed a similar pattern of strong gains in October and November followed by months-long consolidation as investors await the results of CRISPR Therapeutics' trial which is the first for a gene-editing treatment. Preliminary results have been positive in the treatment of rare blood diseases and complications from sickle cell.
Investors are eagerly anticipating the results of a full trial given the potential to treat these types of diseases, although it's not expected to be completed until early-2021. Both Editas and Intellia Therapeutics are seeking approval to launch trials for their own products in the coming year, as well. Given the barren pipeline of major pharmaceutical companies and their flush balance sheets, these stocks will make natural M&A targets as well.