After suffering one of their worst Aprils in years, biotech sector-related exchange traded funds could be in for even more pain ahead.
Year-to-date, the SPDR S&P Biotech ETF (NYSEArca: XBI) has declined 32.2% and the iShares Nasdaq Biotechnology ETF (IBB), the largest biotech-related ETF by assets, has decreased 21.9%.
Biotechnology stocks have suffered through their worst April on record amid regulatory concerns and the shift toward safer plays in a volatile market environment, Bloomberg reports.
Biotech stocks in the Russell 2000 just finished their worst April since at least 1997. The sector has retreated about 65% from its February 2021 highs and dropped 22% in April alone.
Jefferies strategist Will Sevush noted that biotech stocks are revealing striking similarities to the 2000 tech crash, with the rise of companies at an early stage of development with little or no way of generating revenue. Furthermore, retail traders rallied behind the exuberance that pushed the sector to all-time highs.
Consequently, the analyst warned that if the early-stage drug developers follow a similar pattern to the tech bubble crash, the biotech market may not hit a low until next fall.
“Biotech saw a very deep scrape for therapeutic assets that are very early in development where you haven’t seen that many IPOs,” Sevush told Bloomberg. “It matches the zeitgeist of the Nasdaq 2000 crash.”
“When you have this much value destruction it creates its own risks,” Sevush added.
Piper Sandler analyst Christopher Raymond followed fund flows for the sector and pointed out that sell-offs historically touch rock-bottom lows when the ratio of inflows to outflows slips under 0.3. Last time this occurred, XBI rallied in the following months. According to Piper’s analysis, the ratio dipped to 0.58 this week, which makes it too soon to signal an end to the collapse.
“We’re in the later innings but I don’t think we’re done. A turnaround isn’t on the immediate horizon,” Darren Chervitz, chief portfolio manager of the Jacob Discovery Fund, told Bloomberg.
Chervitz argued that the sector won’t find a bottom until established drug makers start buying up their tiny R&D stage peers.
“We have some more pain ahead to cleanse the system,” Chervitz added.
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