Analysis: Deals and data buzz could help biotech stocks move out of Wall St’s “no man’s land”

Traders work in the main trading floor of the New York Stock Exchange shortly after the opening bell of the trading session in the Manhattan neighborhood of New York on January 7, 2016. REUTERS / Brendan McDermid / File Photo / File Photo

NEW YORK, Oct. 15 (Reuters) – Stagnation in US biotech stocks could require a wave of deals or exciting clinical trial results if the sector is to join the stock market party after falling behind Wall’s large lead Street this year.

Greater certainty about the direction of prescription drug regulation, including the prospects for stricter pricing legislation, could also bolster inventories.

An S&P 500 biotechnology company index (.SPLRCBIOT) is up 2% so far in 2021, while the entire S&P 500 has gained more than 18%. A closely watched ETF that better measures small and mid-cap biotech companies – the SPDR S&P Biotech ETF (XBI.P) – is down almost 10% for the year and 27% from its peak in February.

According to Jefferies strategist Steven DeSanctis, about $ 2.5 billion has been withdrawn from healthcare ETFs on a net basis since August 31, or about 3% of the total assets of those funds. In the week ending October 6, biotech ETF SPDR posted its largest weekly outing on record, according to data from Refinitiv Lipper.

After a strong 2020, especially for smaller biotech stocks, investors have said the group needs to pull back. But biotech stocks have been lost in major investment themes this year, market watchers have said.

They cited a standoff between stocks that are expected to shine in an improving economy, such as energy and banking, and large tech and growth stocks that have strengthened during the economic downturn.

“It looks like healthcare, and biotechnology in particular, has kind of been in no man’s land since the start of the year,” DeSanctis said. “The market fluctuations have been either, I want to own cyclical stocks and or I want to be defensive.”

Among the big biotech stocks, Amgen (AMGN.O), a member of the Dow Jones Industrial Average (.DJI), is down 10% so far in 2021, while Vertex Pharmaceuticals (VRTX.O) has fallen 23%. %.

The S&P 500 biotech index trades at a price-to-earnings ratio of 10.2 times forward earnings estimates, a 50% reduction from the S&P 500’s P / E ratio of 20.4, according to data from Refinitiv Datastream.

“When you look at large caps, the growth opportunities and outlook are much more challenged than they have been in the past,” said Marshall Gordon, senior healthcare analyst at Clearbridge Investments.

For smaller companies, investors often seek a pick-up in acquisitions to help improve biotech valuations. Healthcare companies have nearly $ 500 billion in cash, a record amount, according to analysts at Jefferies.

“If we start to see more mergers and acquisitions, it should help trigger more positive sentiment in the space,” said Sahak Manuelian, head of equity operations at Wedbush Securities.

Not all biotechnology stocks have experienced difficulties this year. Shares of COVID-19 vaccine makers Moderna (MRNA.O) and BioNTech have increased by more than 200% so far in 2021.

But recent industry setbacks could be bitter: Biogen’s controversial new treatment (BIIB.O) for Alzheimer’s disease has had an uncertain launch, shares of Apellis Pharma (APLS.O) have plummeted to the following disappointing data for its investigational eye drug, and US regulators suspended cancer medicine studies from Allogene Therapeutics (ALLO.O).

Data for the coming months from major medical conferences, including a hematology meeting in December, could rekindle interest in biotechnology, Manuelian said.

Regulatory obstacles also persist. SVB Leerink analyst Geoffrey Porges said this week in a memo that it was “difficult to see” a large rally in the biopharmaceutical group in part because of “the persistent excess of risk associated with the regulation of drug prices, which we believe should last until the end of the year. “

Uncertainty over the Food and Drug Administration, the main industry regulator for which President Biden has yet to appoint a permanent commissioner, could also cloud the investment environment, investors said.

“There have been a number of regulatory decisions that have been surprising,” Gordon said. “There are concerns that the FDA will be increasingly difficult or just plain less predictable.”

Reporting by Lewis Krauskopf; edited by Megan Davies and David Gregorio

Our standards: Thomson Reuters Trust Principles.

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