This week Wood Mackenzie, an Edinburgh-based research and consulting firm, reviews recent trends in biotechnology stocks.

The Nasdaq biotechnology index has fallen steadily since the end of February, losing 13% of its value over the past eight weeks, and 8% since the start of the year. Early in the period charted above, general stock indices were rising, indicating that events specific to the biotech sector were behind the declines. However, all industries and market indices suffered in May, when fears over US inflation caused a steep drop across the board.

Paradoxically, the downward slide of the biotechnology index coincided with strong 2005 results by leading biotechnology companies. The past eight weeks have seen declines in the share values of most of them — including big hitters such as Amgen, and Gilead whose stock fell by 7% and 11%, respectively, and Genzyme, which saw a 12% drop. Each company is heavily weighted in the index, so falls in their share value drag the whole index down.

The steady and uniform decline of the biotech index indicates a market correction, rather than a panic. After a 12-month rise, investors seem to have judged many biotechnology companies over-valued, and have cashed out to lock-in their gains.

The least affected of the major biotechnology stocks was Biogen Idec. The company's 2% drop over the past eight weeks follows an involuntary ‘correction’ of 40% in February 2005, when safety fears caused its candidate drug for multiple sclerosis, Tysabri, to be withdrawn.