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A rally in biotech stocks has raised hopes of a turnaround from the sector’s worst run this century, as drug developers suffered from rising interest rates and a backlash to pandemic-era euphoria.
Even as the wider US stock market approaches a record high, the S&P biotechnology index remains more than 50 per cent below its early 2021 peak.
However, the sector has been one of the biggest beneficiaries of a recent shift in interest rate expectations, bouncing more than 25 per cent since the start of November. A 5 per cent gain on Wednesday pushed it into positive territory for the year after declines of more than 20 per cent in 2021 and 2022.
“In late 2020 and early 2021, many early-stage companies hit valuations that didn’t make any sense,” said Andy Acker, a healthcare portfolio manager at Janus Henderson. “Now we have the opposite situation . . . [so] we’re combing through the wreckage to try to acknowledge companies that have been left for dead.”
Some of the biggest contributors to the index’s recent weakness include vaccine developer Moderna and Altimmune, which is developing anti-obesity treatments.
Moderna’s shares have tumbled more than 50 per cent this year as demand for its Covid-19 vaccines wanes. Altimmune lost more than half of its value in a single March day after a drug trial showed severe side effects for some patients.
In October, before the recent market rally, a record 232 life sciences companies globally were trading with a market capitalisation below their cash reserves, according to Janus Henderson.
Large drugmakers have also underperformed, with the S&P 500 pharmaceutical sub-index heading for its worst performance relative to the broader S&P 500 in at least 20 years. Pfizer has been the biggest drag on the S&P 500 this year, and on Wednesday hit its lowest level since 2013.
Rising interest rates have weighed on valuations across industries, but the effect tends to be particularly damaging in sectors such as biotech where most companies focus on growth far in the future. The Federal Reserve on Wednesday left benchmark US interest rates at 5.25-5.5 per cent, up from near zero two years ago, but signalled cuts will begin next year.
Chris Shibutani, a healthcare analyst at Goldman Sachs, said: “I have never been in a multiyear phase where macro dynamics have had as much influence as now. Almost every investor has had to become an armchair economist.”
The impact of rates has been exacerbated by an influx of high-risk companies that went public in 2020 and 2021.
Traditionally, start-ups working on new drugs would raise funding privately until they had clinical data to reassure investors about their chances of success.
When markets were surging at the height of the coronavirus pandemic, however, many companies listed their stock with little data.
“There were companies that, if we were all honest with ourselves, probably weren’t ready to be public,” said Rahul Chaudhary, head of healthcare equity capital markets at Leerink Partners.
More than 250 healthcare companies listed in the US between 2020 and 2021, according to Dealogic. Their poor performance has made it harder for others to follow them, with just 24 deals in 2023.
Some companies specialising in areas such as anti-obesity drugs have managed to attract investors despite the tough environment. “Innovation is still happening in the sector, the problem is some innovation has not been valued highly,” said Lorence Kim, managing partner at Ascenta Capital and a former chief financial officer at Moderna.
Kim said that should create opportunities for investors, with “a half-off sale in everything” before the macro picture changes.
Goldman’s Shibutani cautioned that the industry would still face challenges even when interest rates begin to fall, including drug pricing reforms and a looming US presidential election.
Still, belief that the Fed will soon start cutting rates has already started to boost valuations, with the biotech index up 14 per cent in November and 11 per cent this month.
“I think it is nascent optimism right now,” said Chaudhary. “But hope springs eternal, and there is hope that next year the lower rate environment will start to help the sector, you’ll see more companies be able to access capital and importantly you’ll see the generalist investors — who have been absent for three years — start to come back.”
