Could the sector be nearing a turning point in performance?
Biotech continues to significantly underperform the S&P500, which year to date is up 18.2% versus the XBI (up just 2.4%). The broader market recently resumed its upward trend as CPI data was a bit cooler than expected despite continued strong job growth. The debate on the overall market continues to be on the bullish side—a slowdown in rate hikes or plateau combined with the prospects for a soft landing and no recession. The bear case is that the Fed continues to hike rates (which it did in late July after a pause the previous month), consumer spending slows down, and there is a potential for an impending recession.
Biotech has been able to overcome the headwinds of rising rates despite, in many cases, favorable fundamental performance and an acceleration in M&A for public and private companies.
As investors gain a line of sight on an end to rate hikes, the markets are rallying. However, biotech continues to underperform and appears relatively attractive from a valuation standpoint. The fact is, there are biotech stocks that have benefitted substantially from clinical and regulatory successes and the pickup in M&A. But the rising tide where it has existed has not lifted all boats—nor do we think it will if things turn and the group begins to outperform. Biotech is and will likely remain highly bifurcated between the companies being rewarded for good data, financial performance, and healthy balance sheets and those lacking these same characteristics.
Follow-on offerings and aftermarket performance are building momentum as investors have the cash to put to work. While the biotech IPO market has been by appointment only and available only to a few of the highest quality firms, that too is changing with more biotech IPOs in July than in the entire 1H of 2023. This could bring the generalist mutual fund investor back to the sector, which is needed for sustainability. Will they conclude that now is the time to own more biotech? More evidence that the tide may be turning includes:
Gleason wrote in his recent capital markets note: “Since the lows in mid-March, the XBI is up 16% versus the group of companies with less than 12 months of cash, who are down 12%. Bifurcation indeed! That’s unlikely to change.”
Here’s hoping that the next few months/quarters will bring a better tape for biotech.