Many investors hoping for a resurgence by biotech stocks have hitched their wagons to the Federal Reserve lowering interest rates. That’s a practical bet because biotech is a rate-sensitive industry. But amid concern the central bank won’t be able to cut rates over soon, that bet could be a loser.
However, there signs of life for biotech stocks. Consider the case of the ALPS Medical Breakthroughs ETF (SBIO). That fund surged 7.11% last week. That move erased its YTD loss while turning SBIO solidly positive since the start of the year.
One reason for emerging optimism in the biotech space, including toward the mid- and small-cap names residing in SBIO, is that even though rate cuts might be delayed for a while, some biotech companies are renewing their commitment to R&D. R&D is the lifeblood of the biopharma industry. That sentiment is amplified for smaller companies, including SBIO holdings.
AI Could Be Driver of Biotech R&D Efforts
What’s notable about the current renewal of biotech R&D expenditures is that AI — another innovative technology — is playing a vital role in those efforts. A recent report by Deloitte explores the role AI will play in biotech R&D. That includes bringing new efficiencies and productivity to a process that often lacks those important traits.
“Improving productivity in biopharma R&D will never be easy given the need to balance efficiency (cost) and value creation (sales), each of which depends on multiple factors that can influence the drivers of change,” noted Deloitte. “This year, regulatory changes, the impending and unprecedented scale of the loss of exclusivity of high value assets for many companies in our cohort, inflationary pressures, the rapid pace of scientific and technological advances and rising protocol design complexity are all placing significant pressures on the current R&D operating model but are also creating new opportunities to improve R&D productivity.”
How Success Is Achieved by Smaller Biotech Firms
Some large-cap biopharma companies can endure less efficient R&D. That’s because they have the capital to wait out those bumps. However, the same isn’t true of many smaller counterparts whose success hinges on the development and approval of a single drug or therapy.
SBIO diminishes some of that risk. That’s because its underlying index mandates that member firms have at least one drug in Phase II or III clinical trials. It also mandates that those companies have enough capital to survive at least two years on current cash burn rates. That confirms AI could be important to those firms’ efforts to efficiently bring new treatments to market.
“It is therefore important to understand both the trends in costs to develop an asset from discovery to launch and the risk-adjusted forecast revenue of the assets in the pipeline,” concluded Deloitte.
For more news, information, and analysis, visit the ETF Building Blocks Channel.
