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Biotech's Silent Resurgence (5-Year Base Breakout)
Key Takeaways
Biotech stocks are exhibiting relative strength amid a 5-year technical breakout.
The sector is benefiting from AI-driven efficiency gains.
Biotech valuations are near historic lows.
Biotech’s Brutal Bear Market
Starting in early 2021, the notoriously difficult-to-invest-in biotech sector suffered one of its most brutal bear markets in history. The iShares Biotechnology ETF ((IBB - Free Report) ), a proxy for the Nasdaq Biotechnology Index and pure-play biotech companies, slumped 33%, failing to notch fresh highs for more than four years. While a 33% drawdown may not seem like much in a vacuum, such a drawdown has far more meaning when compared to the S&P 500 Index, which rose more than 60% over the same period.
While U.S. markets have enjoyed a multi-year rally mainly driven by big tech, while biotech has suffered a volatile, choppy, and prolonged sell-off. Although large-cap, cash-rich, mega-cap biotech stocks saw less pain, numerous clinical-stage, speculative biotech stocks loss 50% of their value or more. What caused the carnage?
· Higher Interest Rates: Early-stage biotech companies often must rely on borrowed money for a decade or more. Interest rate hikes made borrowing more expensive for these companies.
· Post-COVID Hype Died: While biotech companies were the poster-child of the COVID-19 era on Wall Street, “tourist” investors rushed for the exits afterward, causing selling pressure.
· Regulatory Red Tape: The Biden Administration’s Federal Trade Commission (FTC) took a very “hawkish” approach to mergers and acquisitions (M&A). M&A is the lifeblood of the biotech sector. Additionally, the Inflation Reduction Act (IRA) introduced government negotiations for Medicare, chilling investment in certain therapeutic areas.
Has Biotech Turned the Corner?
The biotech sector is showing promising signs that it has turned the corner. Often, the first sign of a turnaround shows its hand in price, which is why legendary investor Stanley Druckenmiller prefers to “invest, then investigate.” That’s exactly what’s occurring in biotech. The IBB is exhibiting extraordinary relative strength. For instance, the Nasdaq dropped nearly 1,000 points on Tuesday. However, IBB bucked the weakness and gained nearly a percent for the session.
Meanwhile, the longer timeframe also shows promising relative strength. While many tech stocks have plunged off recent highs, IBB is making new highs and is on the cusp of breaking out of a massive 5-year base. As the old Wall Street adage goes, “The longer the base, the higher in space!”
Image Source: TradingView
5 Reasons to Own Biotech
Biotech’s bull case goes far beyond its price action. Below are 5 reasons to own the sector:
AI Will Drive Discovery, Reduce Costs
Discovering a drug and passing a clinical trial can result in years of research and development (R&D) expenses. However, that is likely to change with the advent of high-powered AI models. Predictive AI models and advanced computing infrastructure will dramatically reduce R&D expenses and shave off years of R&D time.
M&A & Reduced Red Tape
Between now and the end of the decade, the biotech industry faces a tsunami of patent expirations on blockbuster drugs. For instance, the Novartis ((NVS - Free Report) ) heart failure blockbuster drug recently lost key patents, and the Pfizer ((PFE - Free Report) ) breast cancer drug will soon. These massive revenue hits will cause big tech companies to acquire clinical-stage biotech companies to fill the void. Additionally, a less hawkish FTC means that more acquisitions are likely to be given the green light.
The Coming GLP-1 Supercycle
Breakthrough GLP-1 drugs like Eli Lilly’s ((LLY - Free Report) ) “Mounjaro” are likely to lead to a biotech super cycle. In fact, GLP-1s are the closest thing the biotech industry has produced to a wonder drug. For instance, GLP-1s have proven to dramatically reduce obesity, inflammation, and the risk of cardiovascular-related death.
Rock-Bottom Valuations
Biotech’s multi-year bear market has resulted in poor sentiment and rock-bottom valuations – a recipe for a bull market. For example, Pfizer’s P/E is currently hovering near an all-time low.
Image Source: Zacks Investment Research
Diversification & Defense
Wall Street’s AI frenzy has likely led to overconcentration in the tech sector. As a result, money managers may look to diversify into biotech and defensive healthcare names.
Bottom Line
With the regulatory friction of a hawkish FTC easing, massive big-pharma cash piles searching for pipeline replacements, and game-changing AI efficiencies coming online, the biotech sector’s fundamentals have fundamentally transformed.
View the Zacks #1 Rank List
Image: Bigstock
Biotech's Silent Resurgence (5-Year Base Breakout)
Key Takeaways
Biotech’s Brutal Bear Market
Starting in early 2021, the notoriously difficult-to-invest-in biotech sector suffered one of its most brutal bear markets in history. The iShares Biotechnology ETF ((IBB - Free Report) ), a proxy for the Nasdaq Biotechnology Index and pure-play biotech companies, slumped 33%, failing to notch fresh highs for more than four years. While a 33% drawdown may not seem like much in a vacuum, such a drawdown has far more meaning when compared to the S&P 500 Index, which rose more than 60% over the same period.
While U.S. markets have enjoyed a multi-year rally mainly driven by big tech, while biotech has suffered a volatile, choppy, and prolonged sell-off. Although large-cap, cash-rich, mega-cap biotech stocks saw less pain, numerous clinical-stage, speculative biotech stocks loss 50% of their value or more. What caused the carnage?
· Higher Interest Rates: Early-stage biotech companies often must rely on borrowed money for a decade or more. Interest rate hikes made borrowing more expensive for these companies.
· Post-COVID Hype Died: While biotech companies were the poster-child of the COVID-19 era on Wall Street, “tourist” investors rushed for the exits afterward, causing selling pressure.
· Regulatory Red Tape: The Biden Administration’s Federal Trade Commission (FTC) took a very “hawkish” approach to mergers and acquisitions (M&A). M&A is the lifeblood of the biotech sector. Additionally, the Inflation Reduction Act (IRA) introduced government negotiations for Medicare, chilling investment in certain therapeutic areas.
Has Biotech Turned the Corner?
The biotech sector is showing promising signs that it has turned the corner. Often, the first sign of a turnaround shows its hand in price, which is why legendary investor Stanley Druckenmiller prefers to “invest, then investigate.” That’s exactly what’s occurring in biotech. The IBB is exhibiting extraordinary relative strength. For instance, the Nasdaq dropped nearly 1,000 points on Tuesday. However, IBB bucked the weakness and gained nearly a percent for the session.
Meanwhile, the longer timeframe also shows promising relative strength. While many tech stocks have plunged off recent highs, IBB is making new highs and is on the cusp of breaking out of a massive 5-year base. As the old Wall Street adage goes, “The longer the base, the higher in space!”
Image Source: TradingView
5 Reasons to Own Biotech
Biotech’s bull case goes far beyond its price action. Below are 5 reasons to own the sector:
AI Will Drive Discovery, Reduce Costs
Discovering a drug and passing a clinical trial can result in years of research and development (R&D) expenses. However, that is likely to change with the advent of high-powered AI models. Predictive AI models and advanced computing infrastructure will dramatically reduce R&D expenses and shave off years of R&D time.
M&A & Reduced Red Tape
Between now and the end of the decade, the biotech industry faces a tsunami of patent expirations on blockbuster drugs. For instance, the Novartis ((NVS - Free Report) ) heart failure blockbuster drug recently lost key patents, and the Pfizer ((PFE - Free Report) ) breast cancer drug will soon. These massive revenue hits will cause big tech companies to acquire clinical-stage biotech companies to fill the void. Additionally, a less hawkish FTC means that more acquisitions are likely to be given the green light.
The Coming GLP-1 Supercycle
Breakthrough GLP-1 drugs like Eli Lilly’s ((LLY - Free Report) ) “Mounjaro” are likely to lead to a biotech super cycle. In fact, GLP-1s are the closest thing the biotech industry has produced to a wonder drug. For instance, GLP-1s have proven to dramatically reduce obesity, inflammation, and the risk of cardiovascular-related death.
Rock-Bottom Valuations
Biotech’s multi-year bear market has resulted in poor sentiment and rock-bottom valuations – a recipe for a bull market. For example, Pfizer’s P/E is currently hovering near an all-time low.
Image Source: Zacks Investment Research
Diversification & Defense
Wall Street’s AI frenzy has likely led to overconcentration in the tech sector. As a result, money managers may look to diversify into biotech and defensive healthcare names.
Bottom Line
With the regulatory friction of a hawkish FTC easing, massive big-pharma cash piles searching for pipeline replacements, and game-changing AI efficiencies coming online, the biotech sector’s fundamentals have fundamentally transformed.