Biotech Ideas

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>>> Biotech Stocks Were Supposed to Come Back This Year. They’re Tanking Instead.


Barron's

By Josh Nathan-Kazis

Jan. 20, 2022


https://www.barrons.com/articles/biotech-stocks-falling-what-next-51642693679


Biotech stocks have never had two consecutive down years before, according to Mizuho analyst Salim Syed. That doesn't meant it couldn't happen now.

This year was supposed to be different for biotech stocks.

If an investor bought a share of the SPDR S&P Biotech exchange-traded fund in late July 2018 and sold it in early February 2021, they would have earned a 76.2% return. But had they kept that share until the market closed on Wednesday, the return would have been negative 1.2%. The S&P 500 returned 71.1% over the same period.

The SPDR S&P Biotech ETF (ticker: XBI) has crossed a threshold in recent days, and is now closing consistently below $100 per share, ending Wednesday at $93.50, and at $94.52 on Tuesday, compared with more than $130 in September. It hasn’t closed so low since the spring of 2020.

During the closing weeks of 2021, a year in which the XBI dropped 26.9%, prognosticators, including us at Barron’s, suggested that a wave of mergers and acquisitions could bring biotech stocks and the XBI back. That isn’t happening.

The biggest healthcare conference of the year came and went last week, bringing no notable M&A, and biotech stocks have accelerated their slide. The XBI is down 16.4% so far in January, as are other biotech ETFs. The iShares Biotechnology ETF (IBB), which is concentrated in larger-cap biotech names, has fallen 13.6% this year.

“Thus far, 2022 has not produced the bounce for which everybody was hoping,” Mizuho analyst Salim Syed wrote in a research note published Wednesday. “The number one question/concern I’m hearing from investors is, what if we are only halfway through this?”

Biotech stocks have never had two consecutive down years before, according to Syed. That doesn’t meant it couldn’t happen now.

What is clear is that the pressures facing the biotech sector remain. High on the list are uncertainty around the Biden administration’s approach to pharmaceutical mergers, and a glut of newly public biotech firms with very early-stage science that is inherently risky.

The tone of the Wall Street analysts who track the biotech sector has gone grim this week. “Investors are still struggling to find reasons to buy and are using catalysts, most of which have been negative, as major liquidity events to sell positions and gross down on their biotech exposures,” Jefferies analyst Michael Yee wrote in a note out Sunday.

Yee wrote that the theory that all the excess cash sloshing around in the coffers of the big pharma firms would mean more M&A this year may not have been correct. “Big pharma such as Bristol Myers Squibb (BMY)] has actually signaled valuations are still high and actually prefer to do smaller licensing / collaboration deals,” Yee said.

That attitude could discourage investors in the public markets, Yee wrote: “From the Street perspective, why step up if big pharma isn’t willing.”

At the same time, an extraordinary number of small biotech stocks are now on offer. According to Renaissance Capital, which runs ETFs focused on U.S. and international initial public offerings, 94 biotech companies went public in 2021. They haven’t been greeted warmly by investors: Those stocks were down an average of 20% from their offer prices as of the start of 2022, according to Renaissance.

Tracking them all is an impossible task even for the professionals. “The sheer number of publicly traded Companies and countless in the private arena continues to pose as the greatest bear-thesis in our view,” Oppenheimer healthcare equity strategy analyst Jared Holz wrote in an email to investors on Monday. “At some point we have to get back to basics. It is not helpful when the leading thesis to every stock is ‘take out.’ But it is going to take some time.”

One safer port in the biotech storm has been the larger cap names in the sector. Vertex Pharmaceuticals (VRTX), which has had its challenges over the past year or so, is up 5.1% so far in 2022. As Barron’s noted earlier this month, the stock is a standout in the sector.

Other larger biotech stocks that have performed reasonably well in recent weeks include Amgen (AMGN), a biotech stalwart that is up 2.8% this year so far, and Incyte (INCY), with a gain of 1.9%. The S&P 500 is down 4.9% so far this year.

Earlier this week, Barron’s highlighted some smaller biotech names that have outperformed in recent weeks, including BioCryst Pharmaceuticals (BCRX), Protagonist Therapeutics (PTGX), and Prometheus Biosciences (RXDX).

“Biotech every year for the last few years and now more than ever has been a stock picker’s market,” Syed wrote. “There are hundreds of publicly traded biotechs, meaning no one investor can follow every catalyst for every stock. The silver lining is this creates market inefficiencies, which could actually be good for investors.”

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