Opinion | Why US biotech stocks are looking healthier after a tough year
- Headwinds are starting to abate with a permanent FDA commissioner installed, uncertainty around drug-pricing reform set to ease and a cash-rich biopharma industry eyeing up biotech’s low valuations
Equities started the year on the back foot but followers of biotech stocks of small to mid-sized market capitalisation will know this segment has been on the defensive for much longer. From a peak in February last year to the early weeks of 2022, the benchmark SPDR S&P Biotech exchange-traded fund – focused on small and mid-cap US biotech stocks – lost over half of its value.
In comparison, the S&P 500 index returned around 12 per cent – the widest performance gap since the 2006 creation of the ETF, better known as XBI.
The sector has faced several challenges: uncertainty around drug-pricing reform following the 2020 US election; regulatory surprises and Covid-19 delays; a frothy IPO market; clinical trial setbacks; and, the prospect of rising interest rates weighing on the valuations of long-duration assets.
But the sector is not defeated. Many biotech stocks are trading well below their long-term business value, giving investors an opportunity to enter at unusually low prices.
To be fair, biotech was due for a pullback. Over the past two years, many drug makers went public at sizeable premiums. And nearly a third of companies that completed initial public offerings last year were in the preclinical stage of development, compared with 18 per cent in 2018.
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Whereas biotech drawdowns typically persisted for less than 70 trading days and chalked up a 28 per cent loss, this pullback is much deeper at more than 240 days. Many companies now trade below the cash value on their balance sheets, and biotech’s average forward price-to-earnings ratio lags that of the S&P 500 and the sector’s long-term average.
