High-flying biotech stocks take a dive, triggering a bad case of jitters

The Nasdaq Biotechnology Index took another nasty hit on Monday, dragging down the broader index and raising a simple question that pundits, investors and biotech execs chewed on all day: Is the biotech party finally over?

To recap, the biotech index plunged close to 5% on Friday as a letter from a few lawmakers in Congress questioning Gilead's ($GILD) $84,000 U.S. price for Sovaldi raised the troubling issue of sustainability for big sticker prices for new drugs aimed at big patient populations. Monday, though, it was clear that the fear had spread to every little biotech from Memphis to Boston. And the idea that the time may have come for the fund managers to take the money and run rattled the entire sector, with Twitter lit up and bloggers abuzz over the prospect of a long-term drop in stock prices.

Success on Wall Street, of course, is infectious. As one fund reaps big rewards from the sector, others rush in. Biotech became a high-flying darling of investors, a sector that attracts its own kind of investor looking for fast returns. And the trend inspired an unprecedented burst of IPOs.

Renaissance Capital counted 37 biotech IPOs last year, creating a column that dwarfed any record of the past 15 years. In the previous 5-year stretch--the drought following the 2008 financial crisis--there were 29 IPOs. And with the first quarter of 2014 nearly over, there have already been 25 biotech IPOs--a pace that would theoretically put the industry on track to 100 new offerings, if that was possible.

Biotechs which had held back looking for a window into the public market mobbed Wall Street last year. Others followed early this year, not wanting to miss the chance. And in addition to the billions raised in the past 5 quarters from IPOs, billions more was funneled in through follow-on offerings from investors happy at the chance to ride the wave.

A lot of that money is in the bank, ready to fund R&D for years to come, regardless of how this jittery stage ends up. By the end of day on Monday just using the 'b' word was enough to attract a host of angry rebuttals on social media, fearful that calling the massive runup in biotech stock prices a bubble would incite the kind of panic needed to fashion a needle.

If success is infectious among investors, fear is more like a pandemic.

Possibly this is just the correction before the next big surge. But stock prices don't rise forever. The bigger they are, the harder they fall.

Special Report: The top 10 biotech IPOs of 2013

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