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Tuesday, 12/07/2021 1:53:06 PM

Tuesday, December 07, 2021 1:53:06 PM

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Biotech Is in the Dumps Because of Private Markets, One Analyst Says --
10:58 am ET December 6, 2021 (Dow Jones) Print
Josh Nathan-Kazis
It's a paradox driving health-care investors to distraction: Why, in a year when biotech delivered vaccines and treatments
for the Covid-19 pandemic, more-or-less saving the world, is the sector performing so abominably on the public markets?
Over the past 12 months, while the S&P 500 index has climbed 22.7% and the S&P 500 Health Care sector index has
gained 15.9%, the iShares Biotechnology ETF (ticker: IBB), which tracks the sector with a focus on large-cap names, has
eked out a rise of just 0.4%. The SPDR S&P Biotech ETF (XBI), meanwhile, is down 19.6% over the same period.
In an email to investors late Sunday, Oppenheimer health-care equity strategist Jared Holz proposed a compelling
explanation: Blame it on the private markets.
"More and more funds are allocating dollars in the private markets and are significantly less interested with public equities
and/or stock performance as a result," Holz wrote. "Almost apathetic at times. We believe this bifurcation is the most
drastic we have ever noticed, as the private market activity has been more robust than at any time before."
What that means, Holz argues, is that early-stage private biotechs are sucking up capital. Once they go public, their
technology "has been superseded by another early-stage player looking for funding," and the private money moves on.
Investors have posited, and Barron's has written about, plenty of other explanations for the weakness in biotech: An
overheated 2020, uncertainties around the Food and Drug Administration's approval process, questions about the Federal
Trade Commission's approach to pharmaceutical mergers, the drug-pricing debate, and the slow pace of biotech M&A.
Holz writes that those may be real phenomena, but that they don't explain the sector's weakness this year, because by
and large they aren't new.
"In reality, very little has changed with respect to these issues vs. a year ago," Holz wrote. "And Biotech moved higher by
50% in FY20."
What is new, he says, is a private biotech market that is exploding. "Maybe it's not, but it feels like the amount of money
going into the private Biotech space has no ceiling," Holz writes. "This year, 500+ private Companies have received some
sort of private-stage funding; this is up more than 2x from just four years ago and is setting new record highs each day
with roughly one more month to go here in FY21."
The result has been an avalanche of biotechs going public, many of them with overinflated valuations, creating a
challenging situation for investors. Public-market investors, for their part, have lost interest in the sector, Holz writes. And
Holz argues that private investors are dropping the companies quickly as they go public.
"We would argue the quality of this year's crop is marginally weaker and perhaps not as ready for prime time, but to see
how quickly private investors jettison these stocks only to focus on the next private is perhaps the largest reconciling
item separating sector performance," he writes.
If Holz's analysis is correct, it's a study in unintended consequences for biotech. Exuberance over cutting-edge science is
drawing an avalanche of cash, but the hunt for the next Moderna (MRNA) is coming at the expense of long-term
commitment to these companies, and public investors are left holding the bag

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