Biotech down but far from out
Health-care innovation continues to accelerate.
So far in 2022, the biotech subsector—typically a powerful growth engine—is down more than 20%, entering a second year of subpar performance. Biotech stocks never have had two consecutive down years. That doesn’t mean it couldn’t happen now—especially given overall market volatility and a continued value tilt. There also has been uncertainty about the threat of drug-pricing regulation and the Federal Trade Commission (FTF) taking action to limit pharmaceutical mergers. Specifically, somewhat unclear messaging last year may have made pharmaceutical companies wary not just about doing megadeals but also initiating mergers with smaller biotech firms. The possibility of a big company acquiring a biotech startup offers a measure of comfort to investors and if such acquisitions were off the table, perceived risk in biotech investments likely would increase.
Investing in biotech firms has never been a strategy for passive investors. The reason has to do with the nature of biotech companies. Many operate under Wall Street’s radar, rising and falling on drug trials and regulatory approvals. In their earliest stages, biotech firms may have no products but rather drugs or treatments in the pipeline that could become blockbusters. As a result, it’s a very difficult area in which to chase momentum. On the other hand, the challenge to follow and uncover catalysts for promising biotech stocks means that market inefficiencies abound—a strong positive for investors.
We believe we’re in the early innings of a major innovation cycle
The fundamentals of biology and scientific discovery today are too powerful to dismiss. Many good companies have been dragged down amid this negative wave and our view is there is compelling value in this subsector for those equipped to do the research and follow the science.
Despite the uncertainty about the regulatory environment related to mergers and acquisitions, some pharmaceutical giants have begun venturing into mergers with smaller biotech firms. Projections for 2022 are for a substantial merger-and-acquisition bounce back given large pharma is sitting on an abundance of cash, small biotech stock prices have fallen and the Federal Trade Commission appears ready to cool some of its regulatory rhetoric and zeal. As for drug pricing, congressional legislation remains stalled as lawmakers have been unable to agree on which industry players should be targeted, let alone how to go about doing so.
It may be too soon to call a bottom, and, in any case, biotech typically has been a stock picker’s market. But we believe for investors looking to own companies whose prospects rely more on the strength of their product pipelines than on geopolitics, market dynamics and the Federal Reserve, promising biotech firms are poised to deliver potential long-term growth at substantial discounts.