The speculative sector is getting a boost from renewed optimism among investors. Fundamental drivers such as deal making, new drug approvals and buying by big investors provide confidence that the rally could persist.
The SPDR S&P Biotech ETF, an equal-weighted fund of biotech stocks, is up 41.4% from its 2022 low May 11, while another fund, the iShares Biotechnology ETF, has climbed 21.8% from its own low June 16. By comparison, the S&P 500 is up 16.9% from its 2022 low that same day in June. The S&P Biotechnology Select Industry Index remains down 20.6% this year, and the sector is underperforming all S&P 500 sectors except communication services.
The surge comes after some high-profile healthcare hedge funds, including Perceptive Advisors and RA Capital Management, said they were buying shares in the sector.
All kinds of risky stocks have been soaring lately as investors become less concerned about a series of aggressive interest-rate increases by the Federal Reserve. A rise in interest rates can hurt biotech and other shares with little current earnings but hopes for lots of profits down the road, because higher rates reduce the value of future earnings. Biotech companies research and develop drugs, typically in yearslong processes rife with setbacks, but there is also potential for huge wins when they develop successful treatments.
Smaller investors, long a mainstay of biotech stocks, have become aggressive again too. The struggling retailer Bed Bath & Beyond Inc., for example, traded below $5 a share in late July before surging to $23 (and falling Thursday).
But analysts and investors say there is more going on for biotech than interest-rate hopes and a return of speculation. Recent high-profile clinical studies have been encouraging, a reminder to investors of the progress some biotech companies are making against major diseases and illnesses.
Two weeks ago, Alnylam Pharmaceuticals Inc. reported a successful clinical trial for its heart-disease drug, a potential blockbuster. The stock has risen nearly 60% since the news. On Aug. 5, Karuna Therapeutics Inc. announced impressive results from a late-stage trial for a schizophrenia treatment. The stock has soared to $261 from $140.
If the drug is approved it could have a huge impact, according to some of Karuna’s early investors.
“Having a medicine with a low side-effect profile that has such a major impact on all aspects of schizophrenia is a game changer,” says Robert Nelsen, co-founder of Seattle-based venture-capital firm Arch Venture Partners, which holds a stake in Karuna. “Current drugs have huge side effects and less effectiveness, and patients won’t stay on them.”
Investors are encouraged about recent drug approvals by the Food and Drug Administration and say the recently passed inflation bill won’t curb Medica pricing for biotech drugs as much as some feared.
“The uncertainty over the Medicare drug pricing was replaced with certainty on what the price controls would look like,” says Jeffrey Jay, co-portfolio manager of the hedge fund Great Point Partners.
Biotech Rebounds on Optimism and Deal Making
