Biotech Stocks Set for More Pain After Worst April in Decades

(Bloomberg) -- Biotechnology stocks are facing the grimmest April on record amid regulatory concerns and the market shift to safer bets. Some are even comparing it to the 2000 tech crash, with the worst yet to come. 

Biotech stocks in the Russell 2000 closed out their worst April since at least 1997, when Bloomberg started tracking returns. The sector has tumbled roughly 65% from its February 2021 peak, sinking 22% in April alone.

Jefferies strategist Will Sevush notes that the 2000 tech crash was similarly led by companies at an early stage of development with little to show in the way of revenue. What’s more, retail traders spurred the exuberance that drove both sectors to all-time highs, Sevush pointed out in an interview. Should the early-stage drug developers follow a similar pattern, the market may not reach a low until next fall, his analysis suggests.

“Biotech saw a very deep scrape for therapeutic assets that are very early in development where you haven’t seen that many IPOs,” Sevush said. “It matches the zeitgeist of the Nasdaq 2000 crash.”

Still the dotcom bubble comparison may not be the whole story. Sevush says he originally shared his tech bubble analogy as a throwaway worst-case scenario in January, but the parallels have only grown from there. 

“When you have this much value destruction it creates its own risks,” Sevush said. 

The SPDR S&P Biotech ETF or XBI, a closely-watched fund investors use to monitor the sector, has had its biggest April drop since its 2006 inception. The gauge dropped 18% this month ending Friday trading at a two-year low. 

Piper Sandler analyst Christopher Raymond tracks fund flows for the sector and says the sell-off historically hits rock-bottom when the ratio of inflows to outflows dips below 0.3. The last time it reached that low the XBI rallied in the months that followed. 

Piper’s analysis shows that breadth ratio fell to 0.58 this week, still too soon to signal an end to the collapse. 

“We’re in the later innings but I don’t think we’re done. A turnaround isn’t on the immediate horizon,” says Darren Chervitz, chief portfolio manager of the Jacob Discovery Fund. The fund posted 5-year returns that beat out 99% of peers, according to Bloomberg data, though its focus on small-cap stocks means it has taken a beating of late. 

Until the much larger established drugmakers once again start buying up their tiny R&D stage peers, the sector won’t find its bottom, he says. For now Chervitz says focus on companies with experienced management teams, more than one product in the pipeline and those that have been validated by partnerships or big pharma investments.

“We have some more pain ahead to cleanse the system,” Chervitz said. 

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