By Michael Brush
Well, that didn’t take long.
Biotechnology as an investment sector is so hated, it stumbled into bear market mode for the year in less than a month. The jarring 20% decline happened after the group fell 22% last year, against an S&P 500 /zigman2/quotes/210599714/realtime SPX +0.25% gain of 27%.
“Boy, what a start of a year. And not in a good way,” says Jefferies biotech analyst Michael Yee, who accurately forecasted the 2022 weakness in December when many commentators had turned bullish.
Three things are bugging investors.
1. With so many small and midcap — or smidcap — biotech names down 25% to 40% in the past few months, investors fear hedge fund redemptions will force more selling. “No one wants to try to catch a falling knife,” says Yee.
2. There’s been a slew of depressing drug development setbacks from dozens of biotech companies, including BridgeBio Pharma /zigman2/quotes/212846585/composite BBIO +2.94% , Allakos /zigman2/quotes/203639566/composite ALLK +2.79% , Denali Therapeutics /zigman2/quotes/200043077/composite DNLI +3.08% and Adagio Therapeutics /zigman2/quotes/228559245/composite ADGI +3.77% . By January, 24 of 31 major data readouts were disappointments, by Yee’s count. “How can investors have enthusiasm about buying the group when there is so much bad news?” he asks.
3. Hoped-for buyouts have not materialized.
Put these three factors together, and it’s a bad storm. “The tone is one of significant depression,” says Yee.
The good news is …
As the investing adage says, your best purchases are the ones that are hardest to make. Given how tough it is to get enthusiastic about biotech, this truism tells us the group is a buy. You can take your time to average in, if Yee’s calls continue to be right. He thinks the above concerns could plague the group throughout the first quarter. But he expects the group to end the year higher, which suggests it is already a good time to start accumulating.
Here are five reasons why biotech will end the year higher, and 10 stocks to consider.
Biotech looks cheap
Biotech is so beaten down, several relative valuation metrics suggest it can move up anywhere from 24% to 155%, according to this recent analysis from Bank of America.
Omicron marks the end of the pandemic
Biotech companies got good at marketing via Zoom calls. But let’s face it. For product sales (and a lot of other things), there is nothing like face-to-face meetings. Now that Covid is backing off as a concern because Omicron is relatively mild, sales teams will gradually be able to get out and sell more in person. Patient visits to doctors and psychiatrists will pick up, too. This will increase diagnosis and prescriptions — also boosting sales.
Third, companies will find it easier to do trials, as people become more comfortable with visiting clinics and hospitals to receive experimental treatments. Companies that may get a boost from better trial enrollments in key drug development programs include: Incyte /zigman2/quotes/204510994/composite INCY -0.36% in its programs to develop a treatment for the cancer myelofibrosis, and Intra-Cellular Therapies /zigman2/quotes/209441868/composite ITCI -2.09% in its research on Lumateperone for major depressive disorder, according to RBC Capital Markets biotech analysts.