What has gone wrong with Biotech?


By Jean Strock – 28 March 2022

Biotechnology was the red hot investment sector of 2020 as new mRNA technology was harnessed to develop Covid 19 vaccines in record time. Since peaking in February 2021 the healthcare sector and biotechnology in particular, has been ‘a dumpster fire’ according to one commentator, significantly underperforming the S&P 500 index.

The XBI, an index of small and mid- cap biotechnology stocks has lost half of its value since February 2021  The investment team at OrbiMed who manage the Worldwide Healthcare Trust (WWH) and The Biotech Growth Trust (BIOG) describe this as the worst biotech bear market they have seen in decades.

Partly this is about the rotation from high growth companies into value stocks as inflation bites and central banks accelerate interest rate rises. However the graph below shows the XBI has often performed well in periods when interest rates are rising.

Biotech should also be relatively unscathed by the situation in Ukraine. Fisher & Paykel Healthcare have said they will continue trading in Russia, citing an exemption from sanctions on humanitarian grounds.

So what other factors are at play?

Many non- specialist investors, ‘tourist investors’ have sold out of the sector as the world moves on from Covid to focus instead on geopolitics and inflation. They have also fled Chinese biotech fearing increased government regulation. 

In the USA there is the perception that the FDA has been slow to approve new medicines, again due to the Covid focus. The FDA has not had a commissioner in the twelve months since Joe Biden’s election. Dr Robert Califf who served as the FDA commissioner in the Obama Administration has since been nominated. Dr Califf has a history of support for innovative medicines.  

President Biden’s Build Back Better Act has also been seen as negative for healthcare investment although it would significantly improve coverage for the 9% of Americans who have no health insurance and reduce the cost for those on low incomes.  The Act set out to cap drug price increases, cap the cost of insulin at US$35 per month and allow Medicare to negotiate prices on older drugs.

The drug pricing proposals were dropped by Congress and the Act is now bogged down in the Senate and is unlikely to have a material impact on drug pricing.


What are the prospects for the sector from here?

This has been described as “a golden era of innovation in biotech”. It marks the convergence of biology, engineering and technology.

Some biotech valuations are at 20 year lows with 16% of companies trading below the net cash held on their balance sheets. Rare periods where biotech has underperformed the S&P 500 (SPX) have been followed by a strong rebound as the OrbiMed Advisors graph shows:

Another factor that could revitalise the sector is an uptick in Mergers and Acquisitions. Many larger cap pharmaceutical companies such as Merck, Pfizer and Moderna are sitting on huge cash reserves and have an array of cheap companies on offer. Several large transactions could refocus the minds of investors on these low valuations.

A rebound is also expected in China as the government signals a lighter hand with tech regulation. There has been a large increase in the number of novel drug therapies developed in China, where there is no shortage of STEM graduates, and Western biopharmaceutical companies are increasingly licensing new drugs from China.

In the aftermath of the pandemic many countries will also look to repair and enhance their healthcare infrastructure.

Finally there is the sheer innovation on offer.

  • Liquid biopsies which can find tumour DNA in blood samples can permit early detection and more frequent follow up without the need for invasive and painful tissue biopsies.
  • Big data and machine learning to make drug development faster and cheaper.
  • Gene editing using CRISPA technology inside the body (in vivo) to cure genetic diseases.
  • Leveraging mRMA technology to deliver cancer therapies.
  • A focus on neuro degenerative diseases such as Alzheimers which has 35 genetic associations already known.

The team at Saturn believe an allocation to healthcare is an important part of a diversified portfolio. We look forward to a strong recovery in this exciting sector.