By Michael Brush
3. Biotech isn’t down for the count
Yee describes the sell off as “healthy.” I’d rather see a smaller correction than 20%, but the good news is the sentiment shift hasn’t permanently impaired the group. “If a company has a great story, investors will continue to have an appetite,” says Yee. Just don’t expect the huge moves of last year because that kind of appetite has been dialed back a bit.
He favors companies that have important clinical data this year and a lot of cash, or both. Examples include Olema Pharmaceuticals /zigman2/quotes/222642382/composite OLMA +11.38% , Morphic /zigman2/quotes/212846582/composite MORF -5.98% , Kronos /zigman2/quotes/221573653/composite KRON +1.46% and Prothena /zigman2/quotes/204713496/composite PRTA -6.20% .
4. Early stage ‘pre-clinical’ and Phase I companies are not down for the count either
“Pre-clinical” means no therapies are in clinical trials. Phase I trials are the first step in clinical trials. These early-stage biotech companies have made up 20% to 25% of recent initial public offerings. There were 85 biotech IPOs last year. Seasoned biotech investors are skeptical of early-stage companies. But Yee doesn’t think the current selloff permanently impairs them.
He says the ones with promising “disruptive” science can still do well, as long as investors are patient. He singles out Beam Therapeutics /zigman2/quotes/216229751/composite BEAM -6.26% in gene editing and Denali Therapeutics /zigman2/quotes/200043077/composite DNLI -4.31% , which is developing therapies for neurodegenerative disease like Alzheimer’s disease and Parkinson’s disease based on insights into their genetic causes.
5. Gene editing looks attractive again
For my stock letter I follow insider buying closely. It can be a bullish sign when corporate insiders buy their own stock. Recently significant insider buying at the gene editing company Editas Medicine /zigman2/quotes/200426846/composite EDIT -7.69% makes the stock attractive. It could also signal that other gene editing stocks have sold off to attractive levels, like Crispr Therapeutics /zigman2/quotes/201181046/composite CRSP -8.80% , Intellia Therapeutics /zigman2/quotes/207821052/composite NTLA -8.11% and Beam Therapeutics.
6. There’s no political overhang
Since the arrival of COVID-19, pharma and biotech have gotten a pass from politicians on the left who are keen to regulate drug prices. Now that biopharma has delivered on vaccines and Democrats have regained power in Washington, D.C., it might seem like drug price regulation fervor may return to damage the group. (I’m apolitical and am just observing the risks based on history.)
Yee does not expect draconian regulation. Politicians will focus on price regulation of older drugs, allowing Medicare to negotiate directly with drug manufactures, and state campaigns to import cheaper dugs from abroad. So emerging biotech companies may not be impacted.
“The policies are not significantly harmful to newer, innovative companies,” says Yee.
7. Be careful with vaccine stocks
People are struggling to get COVID-19 vaccines now, but soon we will have more than we need. Johnson & Johnson /zigman2/quotes/201724570/composite JNJ +1.46% , Pfizer /zigman2/quotes/202877789/composite PFE +2.32% and Moderna /zigman2/quotes/205619834/composite MRNA +1.73% will deliver 700 million doses in the U.S. by end of July.
“The market has gone from ‘there isn’t enough’ to oversupply,” says Yee. That’s a challenge for vaccine stocks. Yee has a hold rating on Moderna.
COVID-19 variants could revive interest in vaccine stocks, though.
8. The biotech selling might not be over
The short-term bounce here makes sense given the voracious selling. But Yee is not sure the downdraft is over. “It feels like the sector could move back and test an important area.”
He’s referring to resistance levels of $120 and $110 for the SPDR S&P Biotech ETF, before the big biotech move began in November. This makes sense because in technical analysis, resistance levels turn into support levels once they are surpassed to the upside. If the SPDR S&P Biotech does this, that would represent another 20% decline from here. Ouch.
On the other hand, a lot of damage has been done, so I think it makes sense to begin buying — as long as you have a multiyear time horizon. With this mentality, you are more likely to stick with positions during corrections like the current one. Sharp volatility comes with the territory in biotech.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned ARWR and KOD. Brush has suggested ARWR, KOD, FPRX, PAND, JNJ, PFE and MRNA in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.