Some might argue that biotech stocks — led by Moderna, BioNTech, Regeneron Pharmaceuticals and others — saved the world in 2020 as they launched vaccines and treatments to tackle an inescapable pandemic.
But their stock performance today doesn't reflect it.
After a red-hot 2020 that included triple- and quadruple-digit runs for previously unknown biotech stocks, the formerly red-hot segment is now struggling. In fact, the biotech sector is now entering its second year of vast underperformance. After collapsing 25% in 2021, biotech stocks were down nearly 20% after the first month of 2022.
Experts say it may turn around. Investing in biotech stocks is cyclical. Companies like Pfizer and Moderna now have huge war chests for acquisitions. Some of that deal-making is already underway. Meanwhile, new innovations like messenger RNA vaccines, CRISPR gene editing and precision medicines are making their prime time debuts. Innovation abounds and, as it does, sentiment can turn.
"Even though biotech is the one (segment) that has been getting us out of this pandemic, biotech has been out of favor," said Yaniv Sneor, a founder of the angel investor group Mid Atlantic Bio Angels. "Things are cyclical. So, maybe it's out of favor now but things will come back. And I think it will come back with a roar."
So, can biotech stocks start to rebound? Here are several trends to watch as 2022 and the third year of the Covid pandemic unfold.
Biotech Stocks: Are Mergers Ahead?
The environment is ripe for biotech mergers, says Brad Loncar, chief executive of Loncar Investments. Loncar provides the indexes for two exchange traded funds focused on biotech stocks.
"There are some large companies that have jaw-dropping levels of cash that they need to spend," he said in an interview with IBD.
Pfizer is profiting to the tune of billions from its Covid wares. Novartis sold a $20 billion position it held in Roche. Another pharmaceutical behemoth, Sanofi, is also spinning off its active pharmaceutical ingredients division into a Europe-based company called Euroapi.
Meanwhile, valuations in biotech stocks have fallen precipitously.
"You have really a perfect environment," Loncar said. "You have tons of great companies that have been dragged down and appear to be at attractive prices, and you have large pharmaceutical companies that are more flush with cash than ever before. It's the perfect environment for M&A matchmaking."
Collaboration Deals On The Rise
Some of that is already coming to fruition. In late January, Belgium-based UCB pledged to pay up to $1.9 billion to buy Zogenix, an epilepsy expert.
Pfizer and Bayer also entered into collaboration deals to up their chances of success in CRISPR gene editing. Moderna announced a deal to work on next-generation cancer drugs.
Pfizer also snagged deals to help bolster its burgeoning messenger RNA empire.
Those deals could just be the beginning, said Reid Huber, a partner at health care-focused venture firm Third Rock Ventures.
"There's a lot of dry powder out there in companies and the innovation ecosystem continues to be centered in small-to-midsize companies," Huber told Investor's Business Daily. "It's been a relatively quiet 18-24 months in M&A, and I think most folks believe that's going to change. I tend to believe that."
Genetics Are Key For Biotech Stocks
Experts also expect biotech stocks to continue their deep dive into genetics.
Invitae CEO Sean George calls the human genome "the blueprint to your body." The genome is the complete set of DNA that dictates everything from your hair color to your risk of developing early-onset Alzheimer's disease.
George estimates 20% of health care costs and decisions relate to genetics. But that portion is likely to increase as researchers get a better grasp on the interplay between genetics and disease.
Cancer treatment already has made this transition. Today, targeted treatments look for specific genetic mutations driving cancer. These drugs treat smaller groups of patients. But they are significantly more likely to succeed. That saves the patient from unwanted side effects of unsuccessful treatments, and it unloads some cost from the health care system, Third Rock's Huber said.
"Our understanding of emerging genetics and our ability to make therapies that are much more precise and tailored to specific genetic backgrounds, specific diseases and disease states, that's an exciting area to watch," he said. "It's all fueled by a revolution that we're now two or three decades into: genetics."
CRISPR Drugs: Finish Line In Sight
Some biotech stocks are pushing the envelope with CRISPR gene editing. Later this year, Intellia Therapeutics is likely to unveil additional test results from a drug that edits genes inside human bodies — a major jump forward for the industry.
Meanwhile, others will continue looking to genetics to understand Alzheimer's disease.
"There are multiple ways that these diseases work," said Sneor, the angel investor. "I think ultimately we're going to begin to see certain groups of people react better to certain types of drugs, and we'll begin to understand the breakdown of disease from a big umbrella one to a lot of smaller ones."
The cancer revolution, too, will continue to gain steam. Biotech stocks like Seagen and Sutro Biopharma, as well as big names like Pfizer, AstraZeneca and Roche are working on more precise cancer drugs.
Sutro's biggest push is in antibody-drug conjugates, CEO Bill Newell told IBD. These treatments aim to leverage the killing power of chemotherapy, but only for tumor cells. If you can do that successfully, you can limit the infamously painful side effects of chemo.
"ADCs have hit prime time," Newell said. There were 11 such drugs approved in the U.S. as of late 2021. Sutro doesn't yet sell a commercial drug. Instead, the company generates revenue through milestone payments from partners. This year, that revenue is expected to drop by roughly a third.
Trailing Biotech Stocks Moderna, BioNTech
Biotech stocks and Big Pharma also are embracing the power of messenger RNA, or mRNA.
Messenger RNA is the body's delivery system for instructions to create proteins. Pfizer and Moderna famously created Covid vaccines based on mRNA technology in under a year as the world scrambled to remain socially distant and masked. The timeline won't be the same for non-pandemic products. But it impressed experts nonetheless.
"MRNA has been used for the creation of these vaccines," angel investor Sneor said. "MRNA was a yet unproved technology before Covid hit and a lot of people had a lot of questions about it. It was not in the marketplace. And now, of course, it is. I think you're going to see more and more people begin to use mRNA for other applications."
The godfathers of mRNA — Moderna and BioNTech — are testing their technology in other infectious diseases like respiratory syncytial virus and influenza. They also are testing cancer treatments.
Meanwhile, Pfizer plans to push deeper into the mRNA field, with and without BioNTech, while Sanofi also tests out a messenger RNA-based vaccine to tackle Covid.
Biotech stocks stand a chance of reinvigorating enthusiasm on this modality and others.
"Everyone should be well aware of the therapeutic power and innovation cycle we're in, in medicine," Third Rock's Huber said. "MRNA vaccines is one very good example. It happens to be the example that is going to have saved millions of people around the globe, but it's just one example."
AI And Drug Development
On the cutting edge, some biotech stocks are pushing the boundaries of machine learning and artificial intelligence. Their goal is to treat diseases many believed were "undruggable."
Take the protein KRAS. It has ties to a number of cancers and, based on the way it's shaped, it's long been impossible for a drug to grab onto and block it.
"It looks like a bowling ball," Relay Therapeutics CEO Sanjiv Patel told IBD.
By using its machine learning system, Relay visualized how another tricky protein called SHP2 moves through space in the body. As it turns out, it occasionally opens in a way that will allow a drug to get a toehold on it. That's the firm's main objective: Find ways to drug tricky proteins that scientists already know have ties to disease.
It wasn't previously possible. In the days of yore, it would have taken a traditional computer centuries to perform the work Relay is hoping to do in under three years.
"Simulation of a protein — you couldn't do it in the 1990s using the entire world's power," Patel said.
Amgen Developing Drug To Treat KRAS
Biotech stock giant Amgen has a drug in development to treat KRAS-tied tumors. The Food and Drug Administration has already approved in lung cancer.
Timothy Springer, a biotech investor and Harvard Medical School professor, says machine learning and artificial intelligence are going to indelibly change drug development. The technologies could also help reaccelerate earlier fervor in biotech stocks.
"Lots of people are talking about it," he said. "I think we're turning a corner now and we are seeing how machine learning can really be put to a great use, to accelerate the rate of drug discovery."
Follow Allison Gatlin on Twitter at @IBD_AGatlin.
