(BFM Bourse) – Fall in interest rates, launch of new drugs and revival of mergers and acquisitions operations…. After three years of crossing the desert, the planets are now aligned for a recovery in the biotechnology sector, note a study by Janus Henderson.
Has the biotechnology sector finished eating its black bread on the stock market? For the management company Janus Henderson, this compartment which was ignored for three years could regain its nobility on the stock market.
“After three years of underperformance, the biotechnology sector is showing signs of recovery that investors should not ignore,” say managers Andy Acker and Dan Lyons.
The management company recalls that the Nasdaq Biotechnology index has recorded a negative performance of -2% per year over the last three years, paling in comparison to the 10% per year generated by the S&P500 index. The losses were even greater for the broader S&P Biotechnology Select Industry index, which includes small and mid-cap stocks, recalls Janus Handerson since it recorded an annualized performance of -14% during the same period.
“This performance contrasts sharply with that of 2020 where low interest rates and the enthusiasm generated by vaccines against Covid-19 helped propel biotechnology stocks to new heights,” recalls the company. management.
While history shows that these declines can take time to reverse, a fresh wind could revitalize the market, according to Janus Handerson. The latter cites an observation that the biotechnology sector records “historically double-digit gains after negative performance.” The lights are therefore green for a recovery in this sector on the stock market. “Today, we have reason to believe that a similar recovery is on the horizon,” say the managers of Janus Handerson.
A more flexible monetary policy
Janus Handerson experts cite several factors that will help revitalize this sector on the stock market. On the one hand, the end of the aggressive monetary policy of the American Federal Reserve (Fed) which is proving to be a key element for a recovery in the biotechnology sector. The management company in fact makes the link between a stabilization or drop in rates and positive performance for biotechnology stocks.
“This relationship began to manifest itself in the fourth quarter of 2023, with the S&P Biotech Select Index rebounding strongly following the announcement of a possible 2024 Fed rate cut,” says Janus Henderson.
It must be said that financing conditions are decisive in the economic model of these companies.
Remember that most of these companies are in the clinical trial phase, and these programs require significant funding. And at the same time, they do not record any turnover. However, with the rise in interest rates, financing is less easy, undermining the viability of several companies. On the Paris Stock Exchange, several of them have lowered the curtain in recent months due to lack of money in the coffers. At the end of January, the bionic eye specialist Pixium Vision was placed in liquidation for lack of a viable buyer to save the company in great financial difficulty.
In May 2023, Lysogene, another company in the life sciences universe, experienced a similar fate after not having received any takeover offer. The company found itself in great financial distress after the partial failure of a clinical study for a potential treatment of Sanfilippo syndrome, a rare, incurable neurological disease of genetic origin.
A resumption of mergers and acquisitions
Janus Henderson also expects a continued resumption of mergers and acquisitions in the biotechnology sector, based on an acceleration in the number of transactions at the end of 2023. According to the management company, 22 transactions with a minimum value of $1 billion were announced last year, twice as much as in 2022.
She specifies that almost half of these mergers and acquisitions transactions took place during the last three months of the year. This recovery was stimulated in part by the decision of the American Federal Trade Commission – the American competition authority – to authorize Amgen to finalize the acquisition of Horizon Therapeutics for an amount of 28 billion dollars, underlines Janus Handerson.
“As regulatory hurdles ease, valuations are low and interest rates fall, mergers should continue to intensify,” says Janus Handerson.
Breaking the patent wall
The launch of new drugs could also contribute to renewed investor interest in biopharmaceutical companies. The management company reminds in this respect that companies in the sector are faced with the “patent wall”, that is to say that their star drugs will fall into the public domain by the end of the decade. This will constitute a loss of earnings for these companies.
So to best negotiate this course, these companies will have to innovate with a view to opening new outlets and thus compensate for the loss of turnover generated by their star drugs. Janus Handerson cites in particular GLP-1 (against diabetes and obesity), which is the heyday of the Danish laboratory Novo Nordisk, gene editing, antibody-drug conjugates, radiopharmacy and cell therapies against cancer and autoimmune diseases.
“New products come from very small innovative companies, or from companies smaller than big pharmas,” recalled Marc Le Bozec, biotech and pharma developer and consultant, on the air of the BFM Bourse show.
“Fundamentally, the profits generated by the heavyweights of the pharmaceutical industry make it possible to write significant checks to acquire companies which are at a fairly early stage of development and therefore to pre-empt these innovations,” continues the specialist.
A recovery yes, but no euphoria yet
However, the management company’s experts are keen to warn about the extent of the recovery. They do not expect a return to the “good times” of the pandemic and during which biotechnology stocks had progressed independently of the quality of the portfolio of their treatments under development or their balance sheets.
“Capital markets remain selective, IPOs have not yet rebounded and many companies could face a cash crunch over the next 12 to 18 months,” experts warn.
Note: performances were stopped at the close of 03/07/2024.
“This is why the market should remain conducive to stock selection. Interesting opportunities will present themselves to investors willing and able to allocate their capital to successful companies,” they conclude.
Sabrina Sadgui – ©2024 BFM Bourse