Bad Returns for Biotech Probably Won’t Get Better Anytime Soon

(Bloomberg) -- Biotechnology’s underperformance to the broader market has only been this bad twice since the dot-com bubble, and Wall Street doesn’t see things getting better in the coming months even with earnings on the horizon.

“If the large-caps biotechnology companies are fundamentally challenged and the smid-caps have great pipelines but capital issues, then people, at least for now, will conclude the entire universe is uninvestable for the near term,” BNP Paribas Asset Management portfolio manager Jon Stephenson said in a telephone interview.

The Nasdaq Biotech Index, a key gauge for investor sentiment, has underperformed the S&P 500 Index by about 15 percentage points so far this year. Pacing for the third worst margin since the dot-com bubble, Wall Street pins the blame on everything from Elizabeth Warren’s rise to President Donald Trump’s drug pricing rhetoric and a broader fire sale of risky names.

Consensus among analysts appears to point toward a rebound sometime in the spring of 2020 amid a lack of catalysts.

“Investors are looking for a positive set of events to step back in, and whatever that is it’s not obvious,” said Jared Holz from the Jefferies’ health-care trading desk.

Changes that could trigger a rotation back into health care include clarity on what’s next for drug pricing and evidence money managers are ready to ramp up their risk exposure, Holz said. “I wouldn’t be surprised if you get an early calendar year trade, but given the political environment and the cast of characters running for the presidency it’s very difficult to draw a line in the sand.”

While earnings season has historically been able to provide a bump to the sector going into November, among biotech’s best months, it’s unlikely to turn the tide this year. Instead, investors and analysts alike have pointed to pockets that may act better over the coming months, be it through impressive data readouts or a wider rotation like what large-cap pharmaceuticals experienced in 2018 when they weren’t expected to catch up to gains in the broader market.

When polled for key events that could lift sentiment for drugmakers or the technologies behind them, investors flagged late-stage data for Sage Therapeutics Inc.’s medicine for patients with major depressive disorder, as well as results from Mirati Therapeutics Inc.’s cancer drug and a gene-editing update from partners Crispr Therapeutics AG and Vertex Pharmaceuticals Inc.

While the Nasdaq Biotech Index started off the year strong -- rallying on Bristol-Myers Squibb Co.’s planned $74 billion acquisition of Celgene Corp. -- the excitement over a banner M&A year has all but evaporated, along with the index’s gains.

The element of “M&A in the early part of the year has seemingly slowed as of late,” RBC Capital Markets analyst Brian Abrahams said in a phone interview, noting deals can play an important role in helping sentiment for small- and mid-cap stocks that have fallen out of favor.

“The sector is not the same as it was five years ago” when large-cap companies had expectations for growth and traded at superior valuations compared to the broader market, Abrahams said. “We’re in a more mature phase of the biotech sector overall compared to where we were five years ago,” however, “there’s as much excitement and enthusiasm about the innovation and the science underlying the space in the bigger picture than ever before.”

As Wall Street continues to digest the latest trade headlines related to China and every tweet focused on drug pricing and the companies that make them, it isn’t all doom and gloom for investors, at least according to Amy Kong, a managing director and senior portfolio manager at Fiduciary Trust Company International.

“It’s not necessarily bad news hitting the sector but a lack of good news continuing to hit,” Kong said by phone. “It’s a tough uphill battle, but in light of where valuations are and if you look at these companies on a case by case basis” investors can find companies that are set to outperform.

To contact the reporter on this story: Bailey Lipschultz in New York at blipschultz@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Jennifer Bissell-Linsk

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