NEW YORK Reuters - Rallying U.S. biotech shares could require a wave of deal-making or exciting clinical trial results if the sector wants to join the party of stock markets after lagging Wall Street's broad advance this year.
More certainty about the direction of prescription drug regulation, including the prospects for tougher pricing legislation, could also boost the stocks.
An index of the S&P 500 biotech companies in 2021 is up 2%, while the total S&P 500 has gained more than 18%. A closely watched ETF that better measures small and mid-cap biotech companies - the SPDR S&P Biotech ETF - is down nearly 10% for the year, and 27% from its high in February.
About $2.5 billion has flowed out of healthcare ETFs on a net basis since Aug. 31, or about 3% of total assets of those funds, according to Jefferies strategist Steven DeSanctis. In the week ending Oct. 6 SPDR biotech ETF had the biggest weekly outflow of all time, according to Refinitiv Lipper data.
After a strong 2020 especially for smaller biotech shares, investors said the group was due to back off. But in 2018 broad investment topics, biotech shares have declined, market watchers said.
They cited a tug of war between stocks expected to strengthen in an improving economy, such as energy and banks, and big tech and growth shares which shined during economic unease.
It seems like biotech and healthcare specifically is sort of in no man's land on a year-to-date basis, DeSanctis said. The swings in the market have either been, I want to buy defensives and or I want to own cyclicals. Among large biotech stocks, Vertex Pharmaceuticals, a member of the Dow Jones Industrial Average, has slumped 10% so far in 2021, while Amgen has declined 23%.
The S&P 500 biotechnology index trades with Price-to-Earn ratio of 10.2 times forward earnings estimates, a 50% discount to the S&P 500's P E ratio of 20.4, according to Refinitiv Datastream data.
When you look at the large companies, growth opportunities and prospects there are a lot more in question than they have been historically, said Marshall Gordon, senior healthcare analyst at Clearbridge Investments.
For smaller companies, investors often look to improve their acquisitions to help improve biotech valuations. Healthcare companies are sitting on almost $ 500 billion in cash, a record amount, according to Jefferies analysts.
If we start to see more M&A, that should spark more positive sentiment around the space, said Sahak Manuelian, Head of Equity Trading for Wedbush Securities.
Of all stocks in biotech stocks, not all hatched this year. Shares of COVID - 19 vaccine maker, Moderna and BioNTech, have surged more than 200% so far in 2021 as market forces escalate.
But recent industry setbacks could be souring sentiment: Biogen's new and controversial Alzheimer's treatment has had an uncertain launch, Apellis Pharma shares tumbled following disappointing data for its experimental eye drug, and U.S. regulators placed a hold on studies of Allogene Therapeutics' cancer medicine.
Will data from major medical conferences, including a December hematology meeting, in coming months regenerate interest in biotech, Manuelian said.
Regulatory obstacles persist. Geoffrey Porges analyst SVB Leerink said in a note this week that it was hard to see a broad rally in the biopharma group in part because of the enduring overhang of drug pricing regulation risks, which in our view is likely to last until the end of the year. Uncertainty about the Food and Drug Administration, the industry's main regulator for which President Biden has yet to nominate a permanent commissioner, may also be clouding the investing environment, investors said.
Gordon said there has been a number of surprising regulations that have been surprising, but not unusual. There are concerns that FDA is either getting more predictable or just getting harder.