Well, it didn’t take long.
Biotechnology as an investment sector is so hated that it went into bear market mode for the year in less than a month. The eye-popping 20% drop came after the group fell 22% last year against an S&P 500 SPX,
gain of 27%.
“Boy, what a start to the year. And not in a good way,” says Jefferies biotech analyst Michael Yee, who accurately forecast 2022 weakness in December when many commentators had turned bullish.
Three things bother investors.
1. With so many small- and mid-cap — or smidcap — biotech names down 25% to 40% in recent months, investors fear that hedge fund buyouts will force them to sell more. “Nobody wants to try to catch a falling knife,” Yee says.
2. Dozens of biotech companies, including BridgeBio Pharma BBIO,
Denali Therapeutics DNLI,
and Adagio Therapeutics ADGI,
In January, 24 of the top 31 data reads were disappointments, according to Yee’s tally. “How can investors be enthusiastic about buying the group when there is so much bad news?” he asks.
3. The hoped-for redemptions did not materialize.
Put those three factors together, and it’s a bad storm. “The tone is one of significant depression,” Yee says.
The good news is…
As the saying goes in investing, your best buys are the hardest to make. Given how hard it is to get excited about biotech, this truism tells us the band is a buy. You can take your time averaging, if Yee’s calls continue to be okay. He thinks the above concerns could plague the group throughout the first quarter. But he expects the group to end the year up, suggesting it’s already a good time to start accumulating.
Here are five reasons biotech will end the year up and 10 stocks to consider.
Biotechnology seems cheap
Biotechnology is so battered that several relative valuation metrics suggest it may rise 24% to 155%, according to this recent Bank of America analysis.
Omicron marks the end of the pandemic
Biotech companies have become adept at marketing via Zoom calls. But let’s face it. For selling products (and many other things), there’s nothing like face-to-face meetings. Now that Covid is receding as a concern because Omicron is relatively mild, sales teams will gradually be able to go out and sell more in person. Patient visits to doctors and psychiatrists will also resume. This will increase diagnoses and prescriptions, which will also boost sales.
Third, companies will find it easier to do trials because people will feel more comfortable going to clinics and hospitals to receive experimental treatments. Companies likely to benefit from increased trial enrollment in key drug development programs include: Incyte INCY,
in its programs to develop a treatment for cancerous myelofibrosis, and ITCI Intra-Cellular Therapies,
in its research on Lumateperone for major depressive disorder, according to biotech analysts RBC Capital Markets.
Mergers and acquisitions will resume
Biotechnology was in such a free fall that potential buyers were content to wait for better prices. Now that biotech stocks are stabilizing and product sales are starting to improve, buyers will show more interest. Big Pharma certainly has the money to buy, as you can see from this chart from Jefferies.
Big Pharma needs it too, given the number of blockbuster products losing patent protection. This graph from Bank of America summarizes the major loss of exclusivity (LOE) at Big Pharma over the next few years, increasing their thirst for buyouts to replenish their pipelines.
This chart shows that biotech mergers and acquisitions are so low, historically, that they have virtually nowhere to go but up.
As mergers and acquisitions (M&A) picks up, the sight of biotech names skyrocketing 60% or more on takeover news will draw investor interest into the space — and the inevitable hunt for the next target. This dynamic will help to turn the sector around. This graph shows you the typical redemption premium, by year. It’s almost always big.
If you want to try to position yourself ahead of takeovers, where to shop for potential targets? First, avoid last year’s crop of initial public offerings (IPOs), which may seem tempting because they’re so hyped.
At the end of last year, 73% of IPOs in 2021 were so-called canceled IPOs – those trading below their IPO price. But these are mostly start-ups. Many of them only have drug candidates in preclinical development.
By contrast, big pharma wants risk-free, late-stage drug candidates well advanced in Phase III trials, says Bank of America biotech analyst Tazeen Ahmad. It distinguishes Alnylam Pharmaceuticals ALNY,
and Argenx ARGX,
as favorites for 2022, in part because they have plenty of potential catalysts. But they also have promising late-stage candidates, making them potential takeover candidates.
Alnylam, which is developing ribonucleic acid (RNAi) interference therapies as a way to quell pathogenic proteins, will release data from a Phase III trial for its patisiran, a potential therapy for transthyretin amyloidosis characterized by the accumulation of harmful proteins. He could also get approval in April for vutrisiran, a therapy for a heart condition called cardiomyopathy. Argenx will launch efgartigimod for a muscle condition called myasthenia gravis, but the drug has potential for other conditions as well.
This chart shows that the most popular biotechnology companies for mergers and acquisitions are in cancer and rare diseases.
In oncology, consider Bicycle Therapeutics BCYC,
and Jasper Therapeutics JSPR,
as potential takeover candidates, says Oppenheimer analyst Jay Olson. The short list of potential candidates for Yee takeover includes Alnylam Pharmaceuticals, Argenx, BioMarin Pharmaceutical BMRN,
and Mirati Therapeutics MRTX,
all of which have late-stage drug candidates for cancer and rare diseases.
There will be a lot of individual business catalysts
This could help turn investor sentiment upside down. Ahmad cites Alnylam’s reading on patisiran, as well as potentially good news from Praxis Precision Medicines PRAX,
and Sage Therapeutics SAGE,
about their therapies for major depressive disorder. Yee quote I-Mab IMAB,
which could publish positive results in its study of its cancer drug Lemzoparlimab; Nektar Therapeutics NKTR,
for potentially good news about his cancer treatment Bempegaldesleukin; and Mirati for updates on its cancer treatment, adagrasib.
The political winds are changing
Biotech investors are forever quivering in fear of another “Hilary moment.” In 2015, presidential candidate Hilary Clinton blew up the industry by suggesting the need for aggressive government intervention to control drug prices. This risk is always in the air.
But now, for better or worse, with President Biden’s ratings at or near an all-time low, it looks like Republicans could gain a lot of ground in Congress in the midterm elections, which could dampen the specter. government price controls. It won’t be good for people struggling to pay the often exorbitant prices for drug therapies, which pharmaceutical companies say are justified because the drug costs billions on average to develop. But it would increase sentiment towards this currently hated stock market group.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no position in the stocks mentioned in this column. Brush suggested INCY, ITCI, ALNY, BMRN, MRTX and SAGE in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.