Despite the quarter end rally, the S&P Biotechnology Select Index ended
2Q 2022 with its worst start to any year ever. The index has fallen for six
quarters in a row, tripling the prior record of only two, and remains in the
midst of the longest and deepest bear market in its history. Mid-June’s
low marked a nearly 65% drawdown from the February 2021 index peak.
Investors were reminded of the importance of staying invested, however,
as the index rallied >15% in the last two weeks of the quarter.
During the quarter, a record >200 publicly listed biotechnology companies were trading at a negative enterprise value (EV = market capitalization net of cash and debt). Several of these negative EV companies were acquired or
otherwise entered into strategic partnerships that led to >100% rallies.
During the worst days of the financial crisis, there were well under half that number trading at a negative EV…
The nearly 18-month long pullback and associated volatility have many investors wondering if the life sciences innovator business model is broken. However, the big picture business prospects continue to look favorable regarding demand, logistics and margins. The outlook for pricing power remains intact as well with limited prospects for material legislative changes in the foreseeable future.
The majority of big pharma companies will lose 33-50+% of their 2023 revenue by 2030, making every viable revenue stream in SMID biotech a potential acquisition target at a certain price relative to the underlying growth rate and duration. Big pharmas are flush with cash with $100 billion generated from COVID-19 vaccines and therapeutics revenue alone. We continue to expect M&A volume to materially increase in 2022 as depressed valuations entice more deals. We continue to expect fundamentals to play an outsized role in the appreciation of many life sciences companies throughout 2022. Material upside is expected when the balance of sector news turns favorable.