Biopharmaceutical Stocks: The Rebound Is Just Beginning

Last May, I invested in the SPDR S&P Biotech ETF (NYSEARCA:XBI) at $85, suggesting that valuations in the biopharmaceutical sector are starting to look attractive. He then announced in mid-October that the bottom had been reached, and emphasized this again in mid-October 2019. Several times since then. The 30-month decline was entirely justified. 2021 has been an extremely greedy part of “fear and greed.” There was no return on bond investments, risk to the strategy was rampant, and IPO supply was significant. Most of the listed companies were very early stage, i.e. preclinical or phase 1, and had valuations of approximately $750 million. This is a stark contrast to the recent past, when the company was involved in at least Phase 2 clinical studies and had a valuation of around $250 million. This means that the current company will not have a commercial product before 2027 and therefore Additional funds must be raised. There was little room for error. Any negative news could have a negative impact on the stock, and with the investment outlook worsening, the funding became very diluted. The adjustments were so severe that the company valuations were often negative.

The floor course for the sector was standard. There was little interest in purchasing and the mood was somber. Stocks mostly did not react to favorable news from medical conferences. Then, intelligent buyers, namely big pharmaceutical companies, recognizing both the absolute valuations of small caps and the large discounts to valuations that come with larger companies, began forming partnerships and acquiring at generous premiums. This has led to renewed interest, but despite the 23% rally, XBI is trading at less than half its 2021 peak and is in line with 2019 levels.

One underestimated fact is that money managers underinvested in the sector in December. If the stock’s strength continues, there will be pressure to add to your holdings before the end of the year to ensure adequate representation. This could trigger a significant uptick leading into the San Francisco Medical Conference week in January.

The fundamentals of the healthcare industry also remain solid. I project that U.S. health care spending will grow at an average of 6% per year through 2030, reaching $7.3 trillion, or 25% of GDP. This will further accelerate due to the aging population due to the baby boomer generation and recent advances in medicine that extend longevity. This trend will likely contribute to utilization as older adults spend significantly more on healthcare.

In terms of attractive investment areas, I think the GLP-1 drug class has become the largest in history, attracting not only pharmaceutical manufacturers such as Eli Lilly (LLY) and Novo Nordisk (NVO), but also vial and injector manufacturers such as McKesson (MCK) and Stevanato Group (STVN). no see. The immuno-oncology revolution is just beginning, as first-generation treatments such as PD-1 are augmented by drugs that act synergistically in other pathways. Applications of bispecific antibodies and antibody drug conjugates are advancing, which could benefit Regeneron (REGN), Eli Lilly, Amgen (AMGN), Genmab A/S (GMAB), AstraZeneca (AZN), and Gilead Sciences (GILD). It will. We note that ImmunoGen (IMGN) is being acquired by AbbVie (ABBV) for $20 billion.

With the recent rise of the XBI ETF, investors may be starting to wonder if they have “missed the rally.” I strongly argue that this is just beginning and that in the short term, gains will be made incrementally as portfolio adjustments are made. But the bigger picture of the biopharmaceutical research renaissance remains the same, with age demographics likely to support strong demand for new treatments.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.