Biotech stocks enjoy brief rally with uncertain winds ahead

Biotech stock trends in 2022

Global biotech stocks have briefly risen after sinking steadily over the last year. Whether this recovery lasts is another question. Here are the latest biotech stock trends for 2022.

In early 2021, biotech stock markets began a long period where stocks dropped in value caused by investors fleeing the sector. This season, known as a bear market, was driven by a multitude of factors including the departure of generalist investors to less risky sectors in addition to concerns around inflation, drug pricing policies and government scrutiny of mergers and acquisitions (M&As).

However, in May 2022, the tumbling biotech stocks stabilized, measured using stock indices such as the S&P Biotech index (XBI) and Nasdaq Biotechnology index (NBI). Since this date, the stocks have even increased slightly, and broadly echo what is happening in the tech-focused Nasdaq stock market more broadly (IXIC index). 

Dylan van Haaften, managing director of equity research at the investment bank Bryan, Garnier & Co, sees the trend as a bear market rally. He added that several stock indices “improved over the summer, but nothing really shifted and [macroeconomic factors] are still very much a topic.”

Rallying points

One reason for the recovery is likely a recent uptick in M&A deals between big pharma companies and biotechs that have seen their market caps lowered by the bear market. In particular, the takeover of Biohaven by Pfizer heralded the first signs of biotech stocks stabilizing in May. This was followed by other M&A deals including between GSK and Affinivax, Amgen and Chemocentryx, and Pfizer and Global Blood Therapeutics. An M&A between Merck and Seagen is also running hot in the rumor mill.

According to Bertrand Delsuc, founder of the business intelligence firm Biotech Radar, the rally is also partly due to fears of an upcoming recession in the U.S. This makes so-called growth stocks like biotech attractive again. However, the rally is only small right now, potentially because many are hopeful of just a brief recession on the horizon.

Other factors buoying up stocks include a slightly better performance in the second quarter from late-stage biotech companies such as argenx. In addition, Delsuc said that the biotech stock market was already in a bad state, “so a small rally was not completely absurd.”

A brief respite

The breather that the rally has provided public biotech markets may allow some time to replenish cash stockpiles in public biotech companies.

“Companies can raise money almost as usual,” noted Delsuc. “Recent follow-on offerings after positive clinical data updates in the U.S. were almost all upsized. So there is life in the U.S.”

In contrast to the hopeful picture in the U.S., there has been very little rebound on the stocks of biotech companies listed in Europe, and many companies are struggling to find cash. This is partly due to a lack of positive newsflow from this geography such as clinical data, M&As and licensing deals.

“Europe often lags the U.S. when it comes to recovering after difficult periods for the biotech sector,” said Delsuc. “Moreover, the situation in Europe in terms of inflation and recession is worse than in the U.S., but the biotech sector is seemingly not considered by investors as a solid sector that is dense enough to be a consistent ‘growth sector.’”

Nonetheless, even if the U.S. is showing life signs, van Haaften warned that now’s not the time for public biotech companies to relax.

“This bear market can last a while … even though we all wish it were different,” van Haaften explained. “Furthermore if we consider funding, take into consideration that the private market has grown substantially larger and more capital-intensive over the past few years, creating greater competition with public biotech companies.”

Inflation and the energy crisis bite

With the globe mired in soaring inflation, the biotech industry might be expected to be hit hard by the crunch in the price of living. However, the trend is complicated.

“In the context of inflation today, drug prices are the least inflationary category,” said van Haaften. He added that healthcare spending tends to remain resilient during inflation, and can stay stable during recessions. However, this may only be of comfort to the largest public life sciences players, as small-to-mid-cap companies that are making a loss will likely continue to fight for funding.

The situation may differ for companies in Europe, where many nations are vulnerable to energy shortages in the coming months. Germany is one example of a country that could face stark gas shortages, exacerbated by the geopolitical consequences of the war in Ukraine

Delsuc noted that German biotech companies such as BioNTech, Morphosys and Evotec were some of the few to highlight the energy issue in their recent half-year earnings, and they don’t expect a significant impact on their operations. 

“The concern is not an issue of cost, but it is more in terms of securing enough gas not to disrupt operations,” said Delsuc. “The German government could potentially cut the supply of gas to certain industries during the winter, if needed, to allocate more distribution for domestic use.” 

What happens next

While the rally gives some hope for progress, the situation remains precarious for public biotech companies. 

“Most investors view this year as a write-off and are looking ahead to next year,” said van Haaften. “In the coming months, we are likely to see some much-needed financing in the sector at lower valuations, which could be viewed as a positive as well.”

There are some reasons to expect some more stabilization in biotech stocks. Many investors in the U.S. draw comfort from the Federal Reserve’s measures and economic predictions, and impending clinical readouts could increase interest in healthcare-focused biotech companies. 

A question mark remains over European biotech stocks. In recent months, Delsuc has seen an underwhelming performance from these companies in terms of licensing deals and the quality of biotechs going public. It’s currently a moment of survival of the fittest with many public companies looking to sell themselves, divest assets or enter into administration or reorganization.

In many cases, most investors are hoping for a light at the end of the tunnel for public stocks, and potentially an improvement in the financial situation happening by the end of this year.

“Globally, I hardly see how it could be worse than what it was for the biotech companies, both in the U.S. and in Europe,” concluded Delsuc.

Explore other topics:

Newsletter Signup - Under Article / In Page

"*" indicates required fields

Subscribe to our newsletter to get the latest biotech news!

This field is for validation purposes and should be left unchanged.

Suggested Articles

Show More