Stocks have done poorly in 2022, but biotech shares have done worse than most. Jefferies analyst Michael Yee has a theory about what is going on. The SPDR S&P Biotechnology exchange-traded fund (ticker: XBI), which tracks the sector, is down 17.7% this year, while the iShares Biotechnology ETF (IBB), which also tracks the sector, has lost 14.2%. That is in comparison to the S&P 500, which is down 6.1%. The losses in 2022 are exacerbating pain for biotech investors that began last year, particularly in the small and mid-cap segment of the industry. The XBI is down 36.5% over the past 12 months, and nearly 50% off the highs the sector hit early last February. Biotech analysts have agonized for months over what has gone wrong with biotech stocks, and what can fix it. In a note out late Friday, Yee says the problem could be that biotech companies just haven’t had much good news. Yee wrote that no single biotech stock with a market cap of over $500 million has climbed 15% or more in a single day so far this year in response to positive trial data. That is compared with 26 such single-day moves in 2021, and 30 in 2020. At the same time, a single biotech stock has dropped 15% or more in a single day eight times this year. “There just [haven’t] been a lot of great data events recently,” Yee wrote. “Investors are in a risk-off mentality and feel data events have weak risk/reward because any positive event might go up (or not) but also might get sold off, and any negative event leads to more downside.” Yee acknowledges that there have been some positive moves this year, but there were mostly for smaller-cap biotechs, with market capitalizations under $500 million. What’s more, even when things have gone well for biotech companies this year, shares haven’t risen much, Yee writes. When Yee looked at positive moves after the release of late-stage data by biotechs with a market cap of over $250 million, he found the average positive move was around 10% in 2022, down from 15% in 2020 and 2021, and 20% in 2018 and 2019. “This suggests, even when events are positive, there is less appetite, resulting in a lukewarm stock move,” Yee writes. Yee says that it will take more positive news to get the sector moving again. “To drive improved sector performance, we need a string of positive newsflow and upside stock situations for investors to get rewarded and to spur improved sentiment around risk/reward,” Yee says.
Some might argue that biotech stocks — led by Moderna (MRNA), BioNTech (BNTX), Regeneron Pharmaceuticals (REGN) and others — saved the world in 2020 as they launched vaccines and treatments to tackle an inescapable pandemic.
But their stock performance today doesn't reflect it. After a red-hot 2020 that included triple- and quadruple-digit runs for previously unknown biotech stocks, the formerly red-hot segment is now struggling. In fact, the biotech sector is now entering its second year of vast underperformance. After collapsing 25% in 2021, biotech stocks were down nearly 20% after the first month of 2022.
Experts say it may turn around. Investing in biotech stocks is cyclical. Companies like Pfizer (PFE) and Moderna now have huge war chests for acquisitions. Some of that deal-making is already underway. Meanwhile, new innovations like messenger RNA vaccines, CRISPR gene editing and precision medicines are making their prime time debuts. Innovation abounds and, as it does, sentiment can turn.
"Even though biotech is the one (segment) that has been getting us out of this pandemic, biotech has been out of favor," said Yaniv Sneor, a founder of the angel investor group Mid Atlantic Bio Angels. "Things are cyclical. So, maybe it's out of favor now but things will come back. And I think it will come back with a roar."
NYR Price at posting:
17.5¢ Sentiment: Buy Disclosure: Held
(20min delay)