JPMorgan: Buy into the biotech bear market

Published Mon, Sep 28 201510:10 AM EDTUpdated Mon, Sep 28 201511:24 AM EDT

The biotech sector plunged 13 percent last week sparked by Hillary Clinton's comments on high drug pricing and her plan for greater regulation of the sector. Investors are wondering what's next for life sciences stocks as they are now in bear market territory, down 22 percent from July's highs. JPMorgan reached out to fund managers to find out their current concerns and analyze the prospects for the biotech sector. Here are the key takeaways in its note to clients sent Monday. "Selectivity may become increasingly important, but we believe overall sector fundamentals remain quite strong: The selloff in the absence of fundamental change creates an opportunity for an entry point in high quality names." Cory Kasimov of JPMorgan believes the sell-off wasn't driven by any valid fundamental changes in the sector and the level of innovation is still at all-time highs. He said the regulatory environment is actually still favorable for the industry. "While last week's headlines represent 'noise,' we see it more likely than not that such headlines/political rhetoric will continue over the next twelve months. More so than last week's comments alone, it is this expectation of ongoing headline risk that we hear as a key concern to generalists." However the political headlines are not likely to end anytime soon and the sector should still be volatile. Read More Lemons in portfolio? Trading Volkswagen scandal "That said, as the industry is currently structured, the US government has limited ability to regulate drug prices and price increases. Further, any change to this structure would most likely take place after the '16 elections and require congressional support where we see a high potential for political gridlock. As a result, we see real changes to the pricing environment as unlikely in the near term." "Generalists are more concerned that these headlines will keep a lid on broader sector performance, and as a result we also hear some specialists concerned not about pricing, but rather that generalists will look elsewhere to invest for the balance of 2015 and into '16." Read More Is Nike signaling China's economy is OK? Overall JPMorgan still believes the biotech sector fundamentals are positive, but expects volatility to continue. However they are skeptical the drug pricing issue will be able to pass the gridlock in Congress, so the firm recommends using the pullback to buy into the best companies.

Pedro Castellano | Getty Images

The biotech sector plunged 13 percent last week sparked by Hillary Clinton's comments on high drug pricing and her plan for greater regulation of the sector.

Investors are wondering what's next for life sciences stocks as they are now in bear market territory, down 22 percent from July's highs.

JPMorgan reached out to fund managers to find out their current concerns and analyze the prospects for the biotech sector.

Here are the key takeaways in its note to clients sent Monday.