The biotechnology industry’s “two-year tear” in stock markets had an abrupt turnaround in mid-March, as growing scrutiny of drug prices alarmed investors and led to a sell-off of biotech stocks, says a new analysis.

General investors, who had flooded the biotech sector with cash to chase its outsized returns, grew nervous about its prospects going forward. Nevertheless, despite being badly beaten in March, the sector still outperformed the major market indices during the first quarter, according to US life science information specialist Burrill Media.

And at the same time, public and private life sciences companies raised $23.3 billion globally, which is 6.4% more than the $21.9 billion raised by these companies during the first quarter of 2013, it notes.

In addition, while merger & acquisition (M&A) activity was sparse in March, life sciences companies completed $47.5 billion in acquisitions in the first quarter of 2014, which is a rise of 190% compared to the $16.4 billion total in deals for first-quarter 2013.

In the US, a letter sent in mid-March by Democratic legislators to Gilead Sciences asking it to explain how it had arrived at the $1,000-a-pill price of its breakthrough hepatitis C therapy Solvadi (sofosbuvir) sparked the biotech sell-off. The move raised concerns about a potential backlash against the high cost of breakthrough drugs coming out of biotech, even though many of these specialty drugs are safer and more efficacious than currently-available treatments, says Burrill. 

And a few days after the Gilead inquiry, the American Society of Clinical Oncology (ASCO) reported that its members would not only now look at the safety and efficacy of the cancer drugs available to them, but also at their price, in determining their value.

Nevertheless, despite seeing a correction in March, the fundamentals of the biotech industry remain strong, according to Burrill. More drugs are getting to market, and revenues and earnings are growing for many of the sector’s leading companies.

‘Though there is talk of a biotech bubble, the recent correction is timely and will lead to a more rational market,” comments Burrill Media’s CEO, G Steven Burrill. “A rising market lifts all stocks, good and bad, and the end of irrational exuberance in biotech stocks is a positive sign for more sustainable valuations of companies,” he adds.