Since last year, biotechnology stocks and exchange traded funds have been among the most disappointing equity assets, wilting against the backdrop of the coronavirus pandemic and in advance of broader deterioration by growth stocks.
Over the past year-plus, it’s been common for market observers to ponder exactly when this biotech bear market — which is getting old by historical standards — will run its course. Pinpointing an exact date is a fool’s errand, but investors can take solace in knowing that the current state of affairs isn’t a permanent affliction for biotech stocks and ETFs.
There is a selection of ETFs focusing on smaller biotech names, including the ALPS Medical Breakthroughs ETF (SBIO). Cowen analysts Phil Nadeau, Lyla Youssef, and Eva Privitera recently ran analysis on prior biotech bear markets.
“We have analyzed the duration and depth of prior biotech bear markets dating to 1998, the ability of the balance sheets of the 194 biotechs under coverage to fund operations, the prices of a representative basket of biotech products over the past ~20 years, the prospects for meaningful drug pricing legislation, the FDA environment since 1993, the correlation of biotech stock performance with aggregate industry revenue since 2000, and the industry’s prospects for growth through 2026,” said the Cowen team.
While the Cowen researchers point out that many small- and mid-cap biotech stocks aren’t yet cheap, 95% of these firms have enough cash to survive at least another year. SBIO’s underlying index goes further, mandating that member firms have enough capital to survive 24 months at current burn rates.
The Cowen researchers also noted that the current biotech bear market, like its predecessors, will eventually pass. Of course, investors are right to demand more, including tangible catalysts.
“We suspect clarity on the potential for drug pricing reform, through either the passage of the current proposal or the abandonment of the legislation, will lift an overhang on the sector. The number of NMEs approved and the number of FDA review cycles necessary over the coming quarters will inform about both the productivity of biotech pipelines and the accommodativeness of the regulatory environment,” concluded the Cowen team.
For more news, information, and strategy, visit the ETF Building Blocks Channel.
vettafi.com is owned by VettaFi, which also owns the index provider for SBIO. VettaFi is not the sponsor of SBIO, but VettaFi’s affiliate receives an index licensing fee from the ETF sponsor.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.