Biotech 2021: the Pain Machine

Biotech looks extremely oversold both intrinsically and relatively to major wider-market benchmarks, just as stated in the post above. Both metrics are at historic lows:

·      ~90% of Biotech stocks are currently in the long-term downtrend (i.e. stock prices are below their 200-day Moving Average), whereas for S&P-500 it's only 33%

·      The second parameter we keep watching is XBI vs. S&P (see chart below), which is hitting 10-year lows

Adding to the misery of pure biotech players is the stellar performance of S&P that demonstrated ~+30% during 2021. Relatively to the S&P, Biotech had the worst absolute drawdown in history:

All major biotech-focused funds suffered, with sporadic exceptions (WSJ article):

The primary causes for such underperformance:

·      Post-2020 "hangover effect." In 2020 money rushed into the sector in quest for a COVID vaccine and "Genomic Revolution" that led to overheating. Signs of macroeconomic risks in Feb 2021 provoked a significant selloff and a rotation from small and mid-cap ("growth") companies into large big pharma ("value") that were somewhat less overbought in 2020

·      Regulatory pressure. a) Investors feared Biden's drug pricing plan (similar proposals in H. Clinton's presidential campaign crashed Biotech back in 2015), b) markets were concerned about FTC antitrust scrutiny (Biden's office, again) that could limit M&A activity, c) FDA didn't have a full-time commissioner after Stephen Hahn resigned in January, d) FDA decisions were not always timely, clear or transparent (many decisions postponed, controversial Adacanumab approval, etc.)

·      Macro: inflation and interest rate spike fears. Interest rates continue to be volatile, and they do have a material impact on short-term biotech trading dynamics

Furthermore, 2021 brought numerous negative or mixed clinical updates for biotech, including suboptimal efficacy and safety updates, particularly in the Gene Therapy space (AAV/LV setbacks)

The most challenging question is when to expect a reversal in Biotech

Current valuations of many quality biotech companies look extremely attractive for a long-term investor but don't rush to fill all of your positions just yet.

The best case we can compare the current situation against is the 2015-16 biotech drawdown. Back in Feb 2016, the rebound happened after broader markets saw a significant correction.

We envision that similarly to 2016 significant change in direction might occur when the broader market sees a selloff of at least 7-10%. Currently, 5% off is all we get, after which the "buy the dip" game kicks in. "It works until it doesn't."