Biotech stocks are down ~40% since Jan 1, 2021, underperforming the broader markets
The democratic white house and Congress since January 2021 likely play a role in the biotech stock downturn, along with other factors
Since mid-June biotech stocks have beaten the broader market and are up ~20-33%
Attractive valuations vs the broader market combined with economic worries likely play a role
Likely less harsh drug pricing environment after the mid-term elections
Is this biotech resurgence a short-lived blip or sustainable?
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Since their peak in February 2021, biotech stocks were on a steady downward trajectory until about 1 month ago. Since then, biotech stocks have enjoyed an impressive 33% runup (Table 1). However, biotech stocks are still down ~40% (XBI) and ~16% (IBB) since Jan 1, 2021 and ~27% and ~17% since Jan 1, 2022 (Table 1). In this article we analyze what likely drove down biotech stocks over the past 18 months, and has likely driven up biotech stocks over the past month. Then we address the key question for biotech investors: Is this just a temporary increase that will be short-lived, or can biotech stocks keep running from here? Finally, for Amp subscribers we discuss Amp's strategy in its various portfolios moving forward.
Table 1. Returns of XBI vs. other ETFs/indices from the indicated date to 7/8/22
*XBI (More weighted to small cap biotechs than IBB)
**IBB (More weighted to medium and large cap biotechs that XBI)
***Dow Jones Industrial
****INX (S&P 500)
We have been communicating since XBI fell into the low $70s and then $60s that the bottom was likely near based on historical prices and patterns (See Table 2). From its meteoric rise from mid 2020 to early 2021, XBI exhibited a meteoric fall through mid-June 2022. The broad Nasdaq similarly has had a tough 2022 but the Dow Jones has held up much better (Table 2). It is noteworthy that volume has been markedly higher for XBI in 2022 (Table 2 bars at bottom), whereas the broad NASDAQ and DJI have not seen similar volume increases in 2022 (data not shown). On a month-by-month basis, it is apparent that XBI underperformed the broader NASDAQ, the DJI, and the S&P 500 in all but 2 months between Feb 2021 and May 2022 (See Table 3 at bottom of this article).
Table 2. 5 yr performance XBI vs. Nasdaq and DJI
Key for Table 2
black = XBI,
purple = Nasdaq,
magenta = DJI,
bars at bottom = XBI volume
So what has driven the huge slide in biotech stocks, especially the more smid-cap weighted XBI ETF, since Feb 2021 and in 2022? First let's look at what drives public smid-cap stock prices. In our view the following factors play a key in public smid-cap biotech stock prices broadly:
1) Present valuations vs. historical valuations
2) Concerns about the economy/broader market
3) U.S. drug pricing reform discussions/progress
4) High profile clinical trial and FDA readouts (positive or negative)
5) Biotech M&A activity
So what likely drove the biotech stock downturn from Feb 2021 to June 2022? January 2021 saw a major change in the U.S. political environment to a democratic senate (democrats already controlled the House) and presidency, and at a time when biotech stock prices were near all-time highs and over-inflated. Democrats are generally much more vocal and active with respect to reducing drug prices. In fact, in November 2021 the House passed Build Back Better legislation, which included drug pricing control provisions (Read this article for details). And the senate has been discussing a similar bill with respect to drug pricing control (July 1 Forbes article). To be clear, this article and these facts are in no way intended to endorse any political agenda or party. However, Jan 2021 raised the tough factual scenario for biotech stocks of over-inflated prices at a time when drug pricing was likely going to come into focus again.
In addition to the political environment raising drug pricing reform concerns for biotech stocks, biotech stocks were likely hurt by the negative press and controversy around the FDA's approval in June 2021 around Biogen's Alzheimer's drug Aduhelm (https://cnb.cx/3yT4OyY), which eventually was discontinued. More Alzheimer's drug development controversy around data integrity and SAVA's simifulam (See this April 2022 Seeking Alpha Article) likely didn't help matters. And finally biotech M&A activity was very slow in Q1 2022 (Fierce article), with biotech corporate development teams likely struggling to figure out how to deal with the massive changes in valuations between record highs in Feb 2021 and near-record 5-yr lows in May 2022.
Fast-forward to today, July 11, 2022, and biotech stocks have started to show some life again. As mentioned above and shown in Table 1, the smid-cap biotech index XBI is up 33% since mid-June. And XBI beat the performance of the overall NASDAQ, S&P 500 and DJI in June and thus far in July (See Table 3 of BPIQ PRO version at bottom of article for detailed data). So what has been responsible for the resurgence in biotech stocks? Attractive valuations vs the broader market combined with economic worries likely play key roles. While biotech stocks hovered near 5 yr lows in May, the broader markets were not far off all-time highs. And the rising inflation and the worries of a recession have likely hurt the broader market, making biotech stocks an attractive investment option again, that should be less-effective by an economic downturn. And our M&A analysis on BPIQ.com showed a pick up of M&A activity to 6 smid-cap biopharma M&A deals at some stage in May 2022. However, the biggest factor is likely discussion of a possible change in Congress to Republican control of one of the chambers in the upcoming mid-term elections. The democratic congress and presidency have very poor approval ratings (read "Usual Midterm Indicators Very Unfavorable for Democrats"). And thus the prospect of a Congress that is less active and effective at passing drug pricing reform is a positive factor for biotech stocks.
Is this biotech resurgence a short-lived blip or sustainable? Read our views in our BPIQ Pro expanded version of this article available to Pro subscribers (SIGN UP NOW (free trial)), or sign up as an Amp Pro member and in addition, learn of our Amp strategy going forward this year.
This article is not investment, tax, or legal advice. Please do your own diligence and seek advice from professional advisors representing your interests.
Article history: Posted 7/11/22 by MV and Amp team
Updated 7/20/22 re: M&A activity uptick in May 2022
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