The biotech sector is at the top of Wall Street's worry list as analysts debate whether high-flying pharma stocks are a bubble that is about to burst.
Trade in biotech stocks was mixed Thursday as US stocks clawed back near even after early losses. Biotech was a key factor in the market's rout Wednesday, which included a 2.4 percent drop in Nasdaq.
Biotech stocks have been among the market's hottest investment over the last year, rising 35 percent on average, with some companies surging even more. Celgene has soared nearly 70 percent, giving it a market capitalization of $94.4 billion, more than Goldman Sachs.
Other high-flyers include Gilead Sciences, which makes the lucrative Sovaldi drug to treat hepatitis C, and Biogen, which last week released promising clinical results for a medication to treat Alzheimer's disease.
There is little question of the sector's long-term promise, but some analysts point out that the commercialization of potential blockbusters like Biogen's aducanumab for Alzheimer's is a lengthy and uncertain regulatory journey.
Biotech companies have been vulnerable to sharp falls on Wall Street on poor clinical or sales results. After an early surge, biotech company Dendreon went bankrupt in November due to poor sales of its once-promising prostate cancer drug Provenge.
"Is the biotech sector in a bubble?" asked Josh Brown chief executive of Riholtz Wealth Management. "Yes. Full stop."
The current round of unrest recalls a US Federal Reserve report released in July 2014 that said valuations for the sector appears "substantially stretched."
- Pharma deal frenzy -
Consolidation has been a factor in the sector's ascent, as comparatively small biotech firms attract attention from pharma heavyweights plagued by patent expirations.
The latest big deal came earlier this month when AbbVie announced plans to buy Pharmacyclics, which specializes in leukemia drugs and had 2014 revenues of $730 million. AbbVie will pay $21 billion under the deal.
So far in 2015, health care and pharma companies have announced $102.3 billion in mergers and acquisitions, the richest total for this time of year since 2009, according to Dealogic.
BTIG analyst Hartaj Singh rejects the thesis that biotech is overvalued.
"I think valuations are fine," he said.
Singh has said in reports that the surge in biotech stock values near multi-year highs reflects "a fundamental shift in the sales and earnings power of the sector."
BTIG cited a 10-20 percent increase in drug approvals by the US Food and Drug Administration and the European Medicines Agency compared with historical norms.
Biotech companies can see earnings spike quickly with winning products. The 13 new drugs approved by the FDA in the first half of 2013 had average peak sales potential of $12.4 billion, or about $1 billion per drug, according to research cited by BTIG.
Still, Singh agreed that the industry could encounter volatility in the upcoming earnings season. The first quarter will make for a difficult comparison because of the strong results put up a year ago.
"There is a lot of nervousness," Singh said, adding that one or two earnings misses could trigger a broader sell-off. "It might not be pretty."