3 Reasons You Should Still Buy Biotech Stocks

Investors in the booming sector of biotech stocks got a wake-up call when Democratic presidential front-runner Hillary Clinton promised to end "price gouging" in the specialty drug market.

Her Sept. 21 tweet was in response to the highly criticized overnight price hike from $13.50 to $750 for Daraprim, a drug that treats life-threatening parasitic infections. Daraprim's maker, Turing Pharamceuticals, is privately owned, but biotech stocks still tumbled, with the iShares Nasdaq Biotechnology ETF (ticker: IBB) falling nearly 5 percent. Many major drugmakers, including BioMarin Pharmaceutial (BMRN), Biogen (BIIB), Gilead Sciences (GILD) and Celgene Corp. (CELG), also fell sharply.

Despite the short-term pain, analysts say the biotech sector still retains a lot of strength. A rare confluence of regulatory streamlining, venture capital, demand and research breakthroughs are propelling the sector through an unprecedented stretch of growth. Here are some of the major factors driving the biotech sector.

Big ideas, big breakthroughs. Analysts agree that biotech is hammering on some of the biggest health threats. Cancer is the top target, but Alzheimer's disease, diabetes, arthritis and hospital-transferred infections and other widespread conditions and diseases affect the most people and represent the biggest return on investment.

In sweeping terms, current approaches include immune system therapies and noninvasive diagnostic techniques.

"We're in a new product cycle," says Paul Karos, senior product manager for Minneapolis-based Whitebox Mutual Funds. "And we're in an environment where there's new and meaningful science bringing new and better cure rates."

For instance, Gilead introduced a hepatitis B therapy that became a $10 billion brand in just a couple of years "because it actually cures people," Karos says.

Immunotherapy is the next big thing in cancer treatment, he adds. It's the idea that your immune system can be jacked up to right cancer. "Instead of tearing you down with chemo, we'll supercharge your immune system," Karos says. "Instead of prolonging life by chemo by months, immunotherapy extends life by years. "

Years to success. The success template usually involves large pharmaceutical companies licensing or somehow accessing emerging technologies from new companies, says Jon Norris, managing director for the health care practice of Silicon Valley Bank, based in Menlo Park, California.

That means the big pharma companies get access to the new drugs and treatments and support the new companies' growth, but let venture capital investors have the hands-on role of working with the companies and managing cash and financing, Norris says.

He and other analysts agree that most new biotechs stay independent for the first several years after their initial public offering. But by their first decade as publicly held companies, many have been acquired or have merged.

Part of the category's growth is due to somewhat streamlined and simplified approvals and improved collaboration with the U.S. Food and Drug Administration, analysts say.

Usually, it takes years of spiraling testing, revisions and reinvestment to nail down the winning protocol. For a breakthrough, it can take a decade and millions of dollars. The FDA has aligned its signoff procedures to better synchronize with the drug development process, and analysts say that is saving both time and money. "The FDA is kinder and friendlier than it has been in the past, but they continue to be stringent. They're just more helpful," Norris says.

Rapid sector growth. "If you want in on fast growth in biotech, get in early on biotech specialty firms," Norris says.

A steady flow of venture capital to biotech firms at all stages of early growth has resulted in an increasing number of companies going public. Biotech companies tend to be bigger -- close to $1 billion in revenues -- when they finally do go public, he says.

Biotechs accounted for 32 IPOs in 2013 and 66 IPOs in 2014. Two dozen companies went public in the first six months of this year, says Norris, who calls the 2014 pop "an anomaly."

Analysts say specialty biotech funds are the usual point of entry for investors. Biotech funds have recently been outperforming the Health Care Select Sector SPDR ETF (XLV) by 14 percent on an annualized basis, Karos says.

Still, even in biotech, there are no quick cures.

"Many of these companies are relying on a single drug in the pipeline for their valuation, while these drugs are in no way guaranteed to ever be released or make a single dime," says Elle Kaplan, CEO and founder of LexION Capital in New York.

Early-stage companies are speculative, Karos says, and the FDA process is designed to weed out marginal therapies. It's impossible to predict the agency's timing or decisions. "Early stage companies are wildly volatile, trading up and down 50 percent to 60 percent," he says.