Biotech Investors’ Happy New Year Is in Jeopardy

(Bloomberg Opinion) -- January has tended to favor biotechnology stocks, and this one has been no exception. Between Bristol-Myers Squibb Co.’s $74 billion bid for industry powerhouse Celgene Corp. and upbeat news at last week’s JPMorgan Chase & Co. health-care confab in San Francisco, there have been enough positive vibes to drive biotech shares to their best-ever start to a year.

Biotech Investors’ Happy New Year Is in Jeopardy

As good as it’s been, headwinds are building that could send sentiment and share prices the other way. First, there’s the government shutdown. The weeks after JPMorgan’s conference are popular times for companies to tap markets for money. Many small firms spend the week pitching their stories to investors and use the conference as a venue to announce good news. Five of biotech’s top 10 weeks in terms of IPO and secondary deal value over the past decade have been in January, and that was without a comparable share-price and sentiment surge. 

But the shutdown has left the SEC running with a skeleton crew, and deals have screeched to a halt. Its backlog will only grow larger as the impasse drags on. That could lead to cash crunches, or result in some firms being forced to raise money in a less attractive market environment. 

Biotech Investors’ Happy New Year Is in Jeopardy

Struggles at the Food and Drug Administration are an even bigger problem. On Sunday, Commissioner Scott Gottlieb tweeted that “the lapse in funding represents one of the most significant operational challenges in the FDA’s recent history.” The agency is continuing to review medicines with leftover prescription-fee funding from 2018. But some reviews aren’t covered by that allocation, and with no new money coming in, the agency will eventually run out of cash. Gottlieb also disclosed last week that the FDA is shifting money from pre-market drug review to post-market safety surveillance. 

With some 40 percent of FDA employees currently not at their desks and the agency tasked with an extensive consumer-protection mandate, a regulatory pileup is inevitable. As biopharma firms begin to release fourth-quarter results and guidance in the next few weeks, they may have to push back previously estimated regulatory timelines. That will be particularly painful for small firms that are bleeding money as they try to get a successful product to market. As it is, investors may have unrealistic growth targets, with many blockbuster drugs beginning to face competition and new ones hard to find. 

Even if the shutdown is resolved soon, there are are threats emanating from Washington, as both Republicans and Democrats push the industry on its pricing practices. On Monday, House Oversight Committee Chair Elijah Cummings opened an investigation into prescription-drug pricing. It’s a rare issue where the two parties might find common ground.

Biotech shares have generally been on a tear this month, but they had their first down day Monday, as measured by the Nasdaq Biotechnology Index. That could be just a slight pause in the rally, or a sign of a potential shift in momentum.

Enjoy the January effect while it lasts.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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