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Biotechs Weakened by The Stock Market Rout

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Biotechs Weakened by The Stock Market Rout

Biotech stocks fell along with broader tech stocks on Monday.

Inflation fears and interest rates have been putting downward pressure on the biotech industry for months.

The Nasdaq lost 521 points, or 4.3 percent, to 11,623.25.

“The thesis that biotech is undervalued at these levels hasn’t really changed,” Thomas Hayes, chairman of Great Hill Capital in New York, told TheStreet. “You’ll see pressure on the group until you get more signs that inflation has peaked and yields are starting to stabilize.”

Biotech stocks have traded in the same way as tech stocks over the past few months, he said.

“There are more biotech companies trading below cash than we have ever seen in our history,” Hayes said. “For the past 20 years or so, every time your company traded below cash, you were at or near a bottom. It might take weeks or months to build a bottom, but as yields stop rising , the group should find some stability.”

Biotech Discounts

Stewart Glickman, associate director of equity research at CFRA, told TheStreet that the decline in biotech companies does not indicate another problem in the industry.

“I think today’s biotech companies are caught in the midst of the market’s recent sharp decline,” he said. “I don’t think it’s an industry-specific trend.”

More than 20% of the 370 companies on the Nasdaq Biotech Index trade below cash, meaning these companies have about $20 billion in cash but are only worth $11 billion today.

In the past, 10% to 15% of deals were below cash, “but this is the highest peak for the percentage of companies dealing below cash,” Hayes said.

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He said the sector is at or near the bottom of a cycle after a surge in the number of biotech stocks trading below cash in the past four times.

The biotech sector needs two catalysts – Wednesday’s Consumer Price Index (CPI) data may confirm that inflation is slowing (year-over-year growth was below the estimated 8.1% increase), similar to the personal consumption expenditures (PCE) index Haye Last Friday’s data was lower than expected, St.

Some biotech companies could be targeted

That could lead to a slowdown in 10-year U.S. Treasury yields as tech and biotech start to stabilize, he said.

“When that happens, the 10-year Treasury yield will stop rising,” Hayes said. “The 10-year yield hit 3.19% this morning before pulling back to 3.07%. You haven’t seen the Nasdaq Biotech start to reflect that slowdown.”

The volatility in the market, he said, was the result of margin calls and technical dislocation selling that needed to be “broken out.”

The current cycle is similar to the 2016-2018 cycle, when markets were in a tightening cycle and the Fed tightened its balance sheet through quantitative tightening. The federal funds rate rose to 2.25% from 0.25%.

“The last time there was a dislocation like this was in 2015-2016,” Hayes said. “The top of XBI corrected about 50% in anticipation of a tightening cycle, and then the biotech industry was in a tightening process over the next two years,” He said.

During the 2016-2018 cycle, the SPDR S&P® Biotech ETF ( (XBI) – Get SPDR S&P BIOTECH ETF Report) was able to reach new highs in two to three years and was up about 140%, Hayes said. One way for investors to get involved in this sector is XBI, which currently owns 157 stocks – the top four are Alkermes ( (ALKS) – Get Alkermes Plc report), Halozyme Therapeutics ( (HALO) – Get Halozyme Therapeutics, Inc. report), Ionis Pharmaceuticals ( (IONS) – Get Ionis Pharmaceuticals, Inc. Report) and Iovance Biotherapeutics ( (IOVA) – Get Iovance Biotherapeutics Inc Report).

With only 15% of biotech companies ever generating free cash flow, it may be difficult for investors to pick out the few that will be the next blockbuster, he said.

The biotech sector has enough money to continue research and development, but some could be targeted by Big Pharma in the short term, Hayes said.

“Big Pharma has money and biotech has innovation; it’s a match made in heaven,” he said. “As many players in Big Pharma are about to face a patent cliff, they will need to buy innovative products. Many of these innovative biotech companies will be acquired by Big Pharma in the coming months and years.”

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