Among the most beaten-down assets in the first month of 2022 were biotechnology stocks, with smaller members of that group enduring significant punishment.
That’s the bad news. The good news is that exchange traded funds, such as the ALPS Medical Breakthroughs ETF (SBIO), may be offering unusually compelling opportunity for investors to get involved at valuations that rarely appear in the smaller biotech equity arena.
In its recent 2021 Review & Outlook for 2022, The Biotech Growth Trust, a U.K.-based fund manager, notes that following the recent bloodletting among smaller biotechnology stocks, some companies in the space are trading below the cash on hand they hold. That’s relevant to investors considering SBIO because the ALPS ETF mandates that member firms have enough cash to survive at least 24 months based on current burn rates.
Along with the potentially compelling valuations, SBIO could offer investors opportunity on another front: easing regulatory headwinds. Some market observers argue that investors are concerned about sweeping drug price reform on Capitol Hill. However, with 2022 being a mid-term election year and Democrats sporting thin majorities in both houses of Congress, the drug price issue might be too controversial for politicians to indulge this year.
“Currently, Biden’s Build Back Better social policy bill is being discussed in Washington, which includes some drug pricing provisions. Passage of that bill could serve as a clearing event to allow healthcare to re-rate,” says Geoffrey Hsu, portfolio manager of the Biotech Growth Trust.
It’s also possible that some SBIO components could get back to providing updates on non-coronavirus treatments, potentially breathing some new life into the smaller biotech equity arena.
Not surprisingly, some biotechnology equity experts believe that consolidation activity will heat up this year. With large-cap biotech and pharmaceuticals companies sitting on massive cash stockpiles and small-cap rivals sporting cheaper share prices, SBIO could be a hotbed of takeover speculation as 2022 moves along. Bottom line: SBIO has some catalysts with which to cobble together a rebound.
“Overall, we think the fundamental drivers of the biotech industry remain intact and the current dislocation provides an excellent entry point for investors,” concludes Hsu.
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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.