Biotech shares have slumped in recent months, stung by setbacks in clinical trials and a rotation away from growth stocks after a steep rally in 2020.
The Nasdaq Biotechnology Index has fallen 12% from its Feb. 8 record, lagging behind the S&P 500, which has gained 5.6%, and the technology-laden Nasdaq Composite, which has slipped 1.4%, over that period. The decline has left the biotech index up 0.2% for the year, compared with respective gains of 10% and 7% for the other two indexes.
The disparity illustrates the heightened riskiness of biotech investing, where clinical trials and regulatory decisions can make or break a company’s value. Investors in biotech stocks are enticed by the potential for handsome gains that can follow scientific breakthroughs. But that prospect is often accompanied by stock-price volatility, since new treatments have no promise of success. Shifts in the economic outlook can also affect perceptions of the group.
Sarepta Therapeutics Inc.,
Amicus Therapeutics Inc.
are among the recent losers for biotech investors, having lost more than half their value so far this year.
“It’s felt like a kitchen sink in terms of the number of factors weighing on biotech sentiment in the near term,” said Andy Acker, who manages the Janus Henderson Global Life Sciences Fund. Among those are disappointing clinical trials, concern about the possibility of renewed focus on drug prices in Washington and the recent rotation into economically sensitive stocks.
Biotech shares enjoyed a powerful rally last year. The Nasdaq biotech gauge soared 26% in 2020 on excitement about the potential for Covid-19 treatments and vaccines as well as a broader rally in shares of companies that can perform when the economy is struggling. The S&P 500, meanwhile, gained 16% last year, and the Nasdaq Composite surged 44%.
Rapid gains or losses in share prices following clinical-trial results or regulatory decisions are a feature of biotech investing, but a smattering of negative news has damped enthusiasm in recent months.
Shares of Sarepta Therapeutics plunged 51% on Jan. 8 after mixed results from a study of a drug targeting a form of muscular dystrophy. The shares are now down 58% for the year.
Amicus Therapeutics shares dropped 33% on Feb. 12 after trial results for its treatment of a rare disorder called Pompe disease disappointed investors. And shares of Frequency Therapeutics plunged 78% on March 23 after the company found its lead drug aimed at treating sensorineural hearing loss didn’t lead to any hearing benefit when given in a four-dose schedule. Those stocks are down 58% and 73%, respectively, this year.
Also weighing on sentiment: The Federal Trade Commission has indicated it is preparing to take a harder line on drug-company mergers, which are a source of potential value for investors in small biotech shops. The commission in March said it would reconsider its approach to scrutinizing deals that could harm competition.
“Biotech can be driven by mergers,’ said Jeremie Capron, director of research at ROBO Global, a research and investment-advisory firm. “A change at the FTC, it reduces the probability of a favorable outcome in terms of an acquisition.”
Analysts will also be keeping an eye on any efforts in Washington to reduce drug prices.
Some investors are betting against companies in the industry. Biotech stocks accounted for five of the 10 most-shorted stocks on U.S. exchanges at the end of March, according to S&P Global Market Intelligence. Short interest in
stood at 34% of shares outstanding as of March 31, followed by
Clovis Oncology Inc.
at 31% and
at 26%, an S&P analysis showed.
As Covid-19 vaccines reach more people and the economy picks up, investors have favored shares of banks, energy producers and other companies that tend to do well in a strong economy. They have been less interested in stocks that hold out the prospect of innovation-driven growth in fields like technology and biotech.
Expectations of a strong recovery have also been seen in the bond market, where falling prices lifted the yield on the benchmark 10-year U.S. Treasury note to 1.562% on Tuesday from 0.913% at the end of last year. As yields climb, borrowing costs for businesses also rise. That often lands hard on biotech companies, where hefty bills for research and development can arrive long before revenue.
Although tech stocks also pulled back in February and March as yields rose, the Nasdaq has since recovered almost all of its losses and is trading back near its highs. Investors are continuing to bet on hardware and software products and services that are already turning a profit.
“The biotech space tends to be littered with nonearners,” said David Wagner, portfolio manager at Aptus Capital Advisors. “When you’re seeing a sharp rise in interest rates, a lot of velocity in interest rates, the companies that are not profitable tend to underperform substantially.”
Investors in biotech say the selloff may be overdone, pointing to the potential for continued scientific advances that could be life-changing for patients. Mr. Acker, at Janus Henderson, said he has used the pullback to add to some favorite biotech positions.
“I do think some of the factors that are weighing on the sector are temporary,” he said.
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