‘Black Cloud’ Over Biotech Could Stretch Into 2017

Biotech stocks are one day away from their worst year in more than a decade. And there’s little immediate reason to expect a big turnaround in 2017.

The Nasdaq Biotechnology Index has fallen 21% in 2016—putting it on track for its biggest decline since 2002, when it tumbled 45%. The losses are striking for an index that had, before 2016, posted double-digit percentage gains seven years in a row.

Index funds focusing on biotech stocks are on pace to close the year with their smallest net inflows since 2012, according to data from investment research firm Morningstar. Investors have put $523 million into the funds through the end of November, compared to $2.6 billion in 2015 and $2.2 billion in 2014.

The bumpy ride for biotech firms has been fueled by something few analysts saw coming: political rhetoric focused on drug pricing. Congress convened hearings on the matter, and Democratic presidential nominee Hillary Clinton repeatedly raised the issue on the campaign trail.

Some investors had hoped the election of Republican Donald Trump would grant the beaten-down sector a reprieve. Investors drove biotech stocks up 9% on Nov. 9, the day after Mr. Trump’s election win.

But those hopes have taken a hit lately, as many investors and analysts have grown increasingly uncertain of Mr. Trump’s stance on drug makers. The Nasdaq Biotechnology Index fell 3% on Dec. 7 after the president-elect told Time magazine he wanted to bring down drug prices.

“While the Republican party may not be eager to limit drug price hikes, Trump’s campaign rhetoric and populist leanings augur poorly for the industry,” said Darren Pollock, portfolio manager and principal at Cheviot Value Management. Investors interested in dipping into the sector should single out companies whose sales aren’t dominated by drugs that could be easy political targets, Mr. Pollock said.

But Mr. Pollock also sees the wisdom of staying on the sidelines entirely, at least for now.

“There’s a large degree of uncertainty when handicapping the potential direction of a new administration,” said Mr. Pollock, who described the sector as having a “black cloud” hanging over it. “To us, it’s prudent to wait and see how this will turn out.”

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