Biotech stocks have been dropping in value since early February, likely depressed by some regulatory and drug pricing concerns, but some analysts think the sector will rebound later this year, partly on the back of M&A deals and new product releases.
After surging 48.3% in 2020, the SPDR S&P Biotech Exchange Traded Fund (which includes Amgen and Moderna) has been skidding this year – since peaking on Feb. 8, the ETF has since plunged about 27% through Tuesday, while the S&P 500 rose some 5.6%
David Nierengarten, a biotech and biopharmaceuticals analyst at Wedbush Securities in Los Angeles, told Forbes that concerns over stalled new drug approvals by the Food and Drug Administration (FDA) are likely weighing on the biotech sector.
Nierengarten also said a plan by the Federal Trade Commission (FTC) to scrutinize biotech and pharma mergers over anti-competitive issues is also weighing on biotech stocks.
Some biotech investors are also concerned about new legislation proposed by Sen. Bernie Sanders that would lower drug prices.
But Jason Butler, an analyst at JMP Securities, told Forbes that trading volumes during this pullback have been “extremely light” and healthcare specialist investors he speaks to do not appear to ‘aggressively taking down exposure.”
In mid-March, the FTC said it would form a working group with its overseas counterparts to more closely examine mergers in the biotech-pharma industries in order to assess their potential impact on competition – a move that could make it harder for industry mergers to go through, anti-trust specialist Jeny Maier of legal firm Axinn, Veltrop & Harkrider, told the FiercePharma publication. The FTC already said it will block biotech firm Illumina‘s planned $7.1 billion acquisition of Grail, a company developing an early stage cancer-detection test. Separately, after authorizing three Covid-19 vaccines for emergency use last year, under President Biden the FDA has been delaying a number of drug approvals, including pushing back a review of Aducanumab, an Alzheimer’s treatment developed by Biogen until June, partly because the agency wanted more evidence of the drug’s efficacy.
In late March, a group of senators led by Bernie Sanders (I-Vt.), introduced sweeping legislation designed to lower drug prices, another potential worry for biotech stocks. Hartaj Singh, an analyst at Oppenheimer & Co. Inc., told Forbes that while biotech investors believe that Washington will likely not make “major changes” to drug pricing, generalist investors, i.e.those who invest across various sectors, are less optimistic about this outcome.
While some people lump biotech and pharma together, they are related, but not quite the same – generally speaking, biotech firms make medicines derived from living organisms (like plants, microbes, etc.), while pharma’s drugs generally have a chemical basis (DNA, amino acids, hormones, etc.). Nierengarten points out that three companies prominently engaged in Covid vaccine research—BioNTech, Moderna, NovaVax—are all biotechs, not pharmaceutical firms. “One could argue that the majority of vaccine development was biotech, not big pharma-driven,” Nierengarten said. Moreover, he suggested that the Covid vaccines with lower efficacy and safety profiles were developed by pharma companies – namely Johnson & Johnson and AstraZeneca.
What To Watch For
Nierengarten said he thinks biotech stocks generally will be weaker in the near-term as growth investors continue to be drawn to “reopening” themes, like travel, airlines, etc. “After the near-term weakness, I expect a rebound by [year-end], triggered by either more attractive valuations, more M&A or both.” But Singh is more sanguine–he expects the biotech sector to “bounce” back in the second quarter with “lots of medical conferences providing news flow on catalysts [to stock prices],” and added that any new drug pricing legislation coming out of DC would likely impact big pharma more than biotech. Butler indicated that sector fundamentals remain strong. “We think positive clinical data will remain the most important driver of upside on a stock specific basis,” he said. “If FDA or drug pricing risks become more evident, we could see further downside.”