Biotech stocks got hammered by drive-by investors, now what?

Covid both stoked and dampened the biotech industry — bringing a flood of investors that left as quickly as they came — leaving the sector reeling with the S&P 500 biotech losing nearly half its value from its peak last February.

Drive-by investors leave the biotech industry down bad…

Retail investors have abandoned biotech — who rushed to the sector during the pandemic. A record number of biotech IPOs launched in the past two years, raising $32.7b according to Refinitiv. But now, 83% of those companies are trading below their IPO price.

Co-head of equity capital markets at Bryan Garnier & Co, Pierre Kiecolt-Wahl gives reasons for the bloodbath (via FT):

• Misunderstood: Biotech requires a specialist background, understanding how clinical trials works – but most retail investors bought on hype.
• Delays: Clinical studies were stuck on standby with the lack of volunteers, staff and hospitals busy with COVID patients which ate into companies’ cash piles.
• Little progress: Lack of results, lack of news also meant less hiring, less spending.

With biotech valuations having massively dropped and big US and European pharma groups with up to $500b to spend, it might be a revival for mergers and acquisitions (M&A) — which dropped to decade lows in 2021.

M&A to patch up the pain?

M&A activity may bring in the cash flow the biotech sector so desperately needs — which could also bring back investors. Instead of recent IPOs, Bank of America biotech analyst Tazeen Ahmad suggests companies with drug candidates in Phase III trials — his picks:

• Antibody and RNAi therapeutics: Alnylam Pharmaceuticals (NASDAQ:ALNY) and Argenx (NASDAQ:ARGX) — may be positioned for buyouts given their promising late-stage candidates.
• Major Depressive Disorder therapies: Praxis Precision Medicines (NASDAQ:PRAX) and Sage Therapeutics (NASDAQ:SAGE).
• Cancer treatments: Bicycle Therapeutics (NASDAQ:BCYC) and Jasper Therapeutics (NASDAQ:JSPR) — buyout picks chosen by Oppenheimer’s analyst Jay Olson’s

Investors: Time heals all wounds

Biotech’s recovery will depend on the world opening back up so trials can resume. In the meantime, biotech companies risk running out of cash in a difficult fundraising environment — and investors have two things to remember:

• Biotech stocks depend on FDA approval.
• Government intervention on drug prices would hurt pharmaceutical stocks.

While Democrats support governmental control on prices, Republicans don’t — and it’s looking positive for Republicans in the midterm elections with low approval ratings for Biden.

The ETF way: For most (who aren’t med or oncology experts), a diversified bet on the First Trust NYSE Arca Biotechnology Index Fund (NASDAQ:FBT) — which tracks 25 of the largest and most liquid US-listed biotech companies — may be a smarter bet.