A perfect storm for biotech stocks

According to STAT News “after a double-digit decline in 2021, the sector has fallen another 20% in the new year, erasing billions in value and leading even the most seasoned investors to question whether biotech has further to fall. Can small biotech companies survive?

Many large pharmaceutical companies reported record performances in 2021, whether that’s a decade-high stock price or shares that outperformed the broader market as investors continued to pour money into companies making COVID-19 vaccines and treatments last year. Biotechs, on the other hand, have seen few of those gains.

Over the past year, the iShares Biotechnology ETF IBB, +3.04% declined 23.3%, the Nasdaq Biotechnology Index NBI, +2.86% fell 20.4%, and the SPDR S&P Biotech ETF XBI, +5.48% tumbled 41.9%; the broader S&P 500 SPX, +1.89%, however, is up 13.0%.

While mergers or acquisitions were a possible outcome for biotechs, merger-and-acquisition activity and value in the pharmaceutical and biotech sectors have dwindled over the past two years. According to EY, there were 69 deals worth $128 billion in 2020 and 90 deals worth $108 billion in 2021. That’s significantly down from 2019, with 70 deals worth $261 billion.

There are reasons to believe that things could get better. For starters, biotech stocks rarely have two bad years in a row. The last time the SPDR ETF suffered a drop of 15% or more was in 2018, and the fund followed it up with a 33% increase in 2019. It dropped more than 15% in 2016 and followed that up with a 44% rise in 2017.

After the Federal Trade Commission formed a working group to scrutinize pharmaceutical mergers, investors are uneasy. Meanwhile, the Food and Drug Administration has delayed several drug approvals, and Sen. Bernie Sanders, I-Vt., introduced sweeping drug-pricing legislation. All of this comes amid a backdrop of rising interest rates.

What’s scaring investors?

1ne: More scrutinization by the FDA on new drug applications. The days of approving almost all cancer drugs, for example, maybe over as the FDA takes a closer look at data.

2wo: Crowded markets. Launching a new drug is getting harder, especially if it doesn’t have blockbuster potential.

3hree: If it’s not blockbuster potential, we don’t want to invest in it. There are a lot of small biotech companies that are developing great drugs that will never reach blockbuster potential. This leaves smaller biotech firms scrambling for cash to get the product approved.

Small and even some large biotech companies usually have an advantage in developing compounds, but it’s all about ROI for investors. Me-too drugs will cut it, and it’s up to biotech firms to develop medicines that redefine treatments.