ARGUS Opinion:
Since 2021, the biotechnology industry has underperformed the broader market, reversing a multi-year trend that had seen superior returns since coming out of the Great Recession. In 2021 and 2022, the equal-weight SPDR Biotech ETF (XBI), which includes more small-cap, development-stage companies, declined 21% and 26%, respectively, compared with a 27% gain and 18% decline for the S&P 500, including dividends. The trend continued in 2023, with XBI gaining 8% compared with a 24% advance for the S&P 500. We attribute the underperformance, particularly for development-stage companies, to factors including a "risk-off" environment amid elevated inflation and increasing interest rates, which contributed to challenging financing markets and a near closing of the IPO window. As well, an elevated number of biotech companies traded below their cash reserves and explored strategic alternatives or bankruptcy. We note increased scrutiny over runaway drug pricing weighing on the industry. But the tide may be turning. Biotech has been on fire since bottoming a few months ago, with the iShares Nasdaq Biotech (IBB) surging 20%-plus and printing a minor breakout of its range back to January 2022. Looking ahead, mergers and acquisitions (M&A) and the ability to raise capital are major keys to growth in the industry. We are encouraged by the return of some larger scale M&A deals and a seemingly healthy appetite for deals from larger biotech and big pharma players, as a new wave of patent expirations for many high-revenue-generating medicines is expected in the second half of the decade. |
