Biotech’s 15% Tumble Triggers More Alarm Bells on Wall Street

Concerns about a lasting selloff in the biotech sector are growing after the Nasdaq Biotech Index posted its worst two days in a year and more analysts added their voices to the chorus warning of rough trading ahead.

The benchmark has plunged 15% from February’s record high, and the drop as measured by the SPDR S&P Biotech ETFcould extend to about 35%, Jefferies analyst Michael Yee said in a research note. That’s in line with swoons going back to 2014, Yee wrote. The performance of recent IPOs will be a key barometer for investor appetite, he said, pointing out that this year’s new listings are already trailing the rest of sector.

“Biotech has been reversing, as we expected might happen,” RBC’s Brian Abrahams wrote, after a rally of over 80% from pandemic lows in March 2020. More pressure could come as battle lines on drug pricing reform are drawn in coming months, he said.

Biotech’s 15% Tumble Triggers More Alarm Bells on Wall Street

New regulatory and macro concerns are taking some of the luster off biotech. The sector is being hit by the rotation away from high-risk, high-reward stocks in favor of more stable and established companies. On top of that, the group faces renewed legislative efforts to curb drug prices, less industry-friendly reviews at the Food and Drug Administration and potential roadblocks for M&A deals, which spurred an SVB Leerink analyst to downgrade six biopharma stocks this week.

A recent spate of clinical trial failures and regulatory setbacks left stocks like Odonate Therapeutics Inc., Frequency Therapeutics Inc., Sarepta Therapeutics Inc. and Athenex Inc. among 2021’s worst performers, with each giving back more than 50%.

Yee tried to offer investors some solace, saying the selloff shouldn’t be as bad as a seven-month plunge ending in the winter of 2017. That’s when the SPDR S&P Biotech ETF sold off more than 40%, in part driven by a tweet from presidential candidate Hillary Clinton on battling the high cost of prescription drugs.

Stock Picking

With sector outflows no more than 5% in the first quarter, money isn’t pouring out of biotech like it has in the past, at least not yet, Yee wrote.

RBC’s Abrahams added that the push for regulatory and legislative change is “still modest and fundamentally manageable.”

Be choosy, Abrahams advised. “This evolving environment would favor companies with less public-payer exposure, those with more international revenue, those with strong patent protection, and those with a slant toward oncology (which Congress favors),” he wrote.

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