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Biotech stock pullback good for industry

That felt good.

I’m talking about the
big biotech stock shakeout last week. Investors knocked about 10 percent of the value off most biotech shares in just two days.

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That includes many of the best-known biotech names in Massachusetts, companies like Biogen Idec Inc., Vertex Pharmaceuticals Inc., and Cubist Pharmaceuticals Inc.

The move also shook up the pipeline of up- and-coming life sciences companies looking to go public. Most of them are waiting and watching now. If biotech IPO prospects were ballplayers, their status would be called “day to day.”

It felt like a two-day seismic event on Thursday and Friday, but biotech stocks have been losing ground for more than a month now. The most widely followed index of biotechnology shares reached a peak on Feb. 25 and has since surrendered 20 percent of its value.

Of course, some companies and investors have been hit harder than others. The $9.4 billion Fidelity Select Biotechnology sector fund, which had gained more than 23 percent for the year through late February, now reports a loss of 5 percent for 2014 so far.

So why would last week feel like anything but a punch in the gut? Because the alternative — stock values spiraling ever higher — would have eventually led to more distress.

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More importantly, it helped deflate biotech stocks before the bubble (yes, that was a bubble) could do any enduring damage to a key industry. A biotech stock collapse from even greater heights could have shut off public funding to promising new companies and for a long time limited the ability of established biotechs to grow.

Biotechnology companies are producing more drugs than ever to ease suffering and save lives. They have created many billions of dollars’ worth of real commercial value. And those companies have emerged as one of the most powerful economic engines in Massachusetts. They are doing important work and have the potential to achieve much more in the future. But those companies need reliable access to capital markets.

Stock bubbles are hard to predict. Don’t waste your time guessing how big they will get, when they will peak, and how hard they will eventually fall. All those unknowns apply to the current biotech stock market.

The biotech index that dropped 20 percent in less than two months? It’s still ahead by nearly 2 percent for the year, after a gain of more than 50 percent last year.

I wrote a column about biotech stocks in bubble territory six months ago. Many of the stocks I follow in that industry are still worth considerably more today.

For example, Biogen Idec shares traded for $236 each when I questioned the values of biotech stocks in October. Those shares peaked above $350 last month and fell hard but still trade for nearly $280 today.

The point: No one knows if the biotech stock correction is nearly over or is simply ongoing. The impact of decisions by momentum-oriented investors is especially hard to predict. On a single day last week, investors pulled out $372 million from a big exchange-traded fund specializing in biotech stocks — 7.5 percent of the fund’s assets.

All those IPO candidates on the sidelines? New companies will certainly make it onto public markets, but investors will be more selective in the short term.

One of the businesses that pulled its IPO last week, Aldeyra Therapeutics Inc., of Burlington, has two employees, zero revenue, and no products that have gone through clinical trials. The company and its $30 million IPO plan are back on the schedule for late next week. We’ll see.

An overheated stock market posed a real risk to the health of the biotech industry. Last week’s modest setback was good medicine.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.

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