Bloodied Biotech Stocks Unlikely to Find Earnings-Season Healing

(Bloomberg) -- Investors in beaten-up biotech stocks looking for something to stem the bleeding probably won’t find it in first-quarter earnings.

While large-cap valuations in the sector are near all-time lows, this earnings season shouldn’t be viewed as a positive catalyst, mainly because the first quarter tends to be the industry’s weakest, according to Piper Jaffray analyst Christopher Raymond. Larger biotech companies are still facing decelerating growth and competition risks as their main franchises are maturing, Goldman Sachs analyst Terence Flynn points out. He expects new-product cycles and capital allocation will remain key areas of focus this season.

Bloodied Biotech Stocks Unlikely to Find Earnings-Season Healing

After a strong start to 2018, momentum in sector has faded fast, with the Nasdaq Biotech Index trading 11 percent below its Jan. 29 high. In addition to the volatility that has gripped the broader stock market, biotechs have been pressured by clinical setbacks that dealt a blow to investors hoping for a wave of deals to reignite growth.

“With so few clean, growth-oriented, earnings-driven names to choose from, generalist interest in biotech may be at a nadir,” analysts at Cowen wrote in a research note Friday. “Given seasonal headwinds, expectations for biotech earnings are modest.”

Meanwhile, investors continue to pull money from the industry. Health care- and biotech-dedicated funds saw three consecutive weeks of outflows in the week ended April 11, Piper Jaffray’s Raymond notes, citing Lipper/AMG Data Services. That brings the net fund flow to $2.4 billion in outflows so far this year.

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