Pathfinders Podcast

Biotech Investors: How to Find Value in a Bear Market

How are top investors navigating the longest biotech bear market in almost 20 years?

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By Chris McCarthy, Ben Snedeker, and Otello Stampacchia, Ph.D.
Published March 23, 2022 | 5 min read
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Key Points

  • Biotech stocks are correcting for long-term performance, as retail and ETF trading dies down, but opportunities lie in companies with potential for revenue growth that are mispriced.
  • COVID-19 has had an enormously positive effect in immunology research, not just for development of future antivirals, but for autoimmune and rare diseases as well.
  • The speed at which companies innovated, regulatory bodies approved, and manufacturing and distribution ramped up was a COVID-19 phenomenon, unlikely to be the new normal for the sector.
  • Successful investments in biotech need to be fundamentally driven: macro-awareness, finding companies with great products, innovation, management teams and track records, and analysis of clinical trial development strategy.

In the long term, the best indicator of outperformance in the therapeutic sector is revenue growth, but in the short term, it’s fund flows. That, according to Ben Snedeker, Senior Therapeutics Analyst at HealthCor Management, is part of what’s at the heart of turbulence in biotech shares in the last few years.

“From 2019 to early 2021, you were seeing incredible fund flows into therapeutics, an incredible number of new listings, so we saw a really meaningful increase in that short-term outperformance based on those fund flows,” he said.

“The challenge has been that we weren't able to convert that explosion in fund flows into an opportunity to start to see meaningful, long-term revenue growth.”

Market observers have looked at drug pricing concerns, perceived lack of M&A, drawdowns from funds and poor after-market performance of IPOs as factors in the current biotech bear market. But Otello Stampacchia, Ph.D., Founder and Managing Director of Omega Funds, also believes that one of the less discussed factors is the reduction in trading volumes from retail traders and ETFs.

“There were a lot of people with a lot of time on their hands in the early days of the pandemic, which led to an explosion of retail trading. Some of that found its way into more speculative stocks like biotech,” he says. “And I think with the reduction of those trading volumes and less attention from those traders, we've also seen a bit of a negative feedback loop with certain ETFs that have been quite exposed to the sector.”

The continuing impact of COVID-19

It’s something of an irony that biotech innovation created the vaccines that brought the world out of the COVID-19 pandemic, but the sector is trading down right now. The effects of the pandemic have been varied and will be felt for a long time to come, both positively and negatively.

“There's been an incredible focus shift from academics and the entire biotech / pharma industry on research into this virus and it’s giving us a ridiculous amount of insight into how our immune system works in interacting with viruses and with host factors,” Stampacchia points out.

“So I think the dividends from this research, not just for antiviral research, but for oncology, autoimmune and rare diseases, is going to be phenomenal. And I really think there's been a massive step up in the pace of discoveries with real translation potential.”

The speed with which companies innovated, regulatory bodies approved, and manufacturing and distribution ramped up was another coronavirus phenomenon, but the after-effect is that some investors and companies expect that pace to be the new normal.

“Accelerated pathways to market, accelerated ramps in product launches, very rapid moves toward substantial revenue potential for newly launched products – I think these are all dynamics that are currently believed to exist in the market because of what we saw from coronavirus and how it changed our outlook on how industry can take a product from early innovation all the way to market,” says Snedeker.

“We need to recognize that a product being developed for important diseases, but not necessarily for global pandemics, is going to have a different path to market than what we saw for pandemic therapies.”

“There's a lot of opportunities in the public markets right now. There's, I believe, over 150 companies that are trading below cash and at some stage that is in an inefficiency / investment opportunity that needs to be arbitraged out.”

Otello Stampacchia, Ph.D., Founder and Managing Director, Omega Funds

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Banishing the bear

As the market adjusts to the post-pandemic world, Snedeker isn’t expecting another surge for biotech stocks.

“What you see following a bear market is a slow grind back. You have a few companies that lead the way initially, others start to a catch up. Sometimes there are elements, things like M&A activity, but that's really more the exception than the rule in terms of how bear markets end,” he says.

But that’s not to say that investors can’t find what they’re looking for in the markets today.

“There's a lot of opportunities in the public markets right now. There's, I believe, over 150 companies that are trading below cash and at some stage that is in an efficiency that needs to be arbitraged out,” says Stampacchia.

“We're going to remain fundamental investors, focused on individual companies within the healthcare ecosystem, but that all needs to be viewed through the lens of being macro-aware.”

Ben Snedeker, Senior Therapeutics Analyst, HealthCor Management

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Picking biotech winners

Biotech indexes may be down, but both Snedeker and Stampacchia see opportunities in the market. In Snedeker’s opinion, investors need to seek out companies with the potential for meaningful revenue growth, particularly those that are mispriced in the current bear market. He also recommends going back to fundamentals.

“Investments still need to be fundamentally driven – companies with outstanding products, excellent innovation, a track record of success, management teams with a strong execution track record, the ability to communicate effectively, companies that are well-funded and match up against important themes that we see from a disease perspective. All of that remains absolutely true,” he says.

“We're going to remain fundamental investors, focused on individual companies within the healthcare ecosystem, but that all needs to be viewed through the lens of being macro-aware.”

Stampacchia also believes in fundamentals and in looking at development pipelines.

“Where we spend a lot of time internally is clinical trial development strategy and competitive analysis. I'm extremely proud of the fact that we invested in companies that have launched 47 products, which is quite unprecedented in our segment of the industry, and with each of those drugs and products come learnings that we apply throughout our investment strategy. So having a certain amount of staying power, if you will, in the industry, I think it's disproportionally impactful,” he says.

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