Biotechnology stocks and the related exchange traded funds are in a prolonged slump, and along the way, calls for rebounds have been plentiful. They’ve also proven inaccurate.
No, biotech stocks and ETFs such as the VanEck Vectors Biotech ETF (BBH) won’t be out of favor permanently. Pinpointing exactly when the group will materially recover, well, that’s another matter altogether. Still, there’s optimism that, with the current biotech slump more than a year old, which is lengthy by historical standards. Some market observers believe a turnaround may already be in the works.
“The sector is positioned well to outperform for a variety of fundamental reasons. Biotechs—along with many other areas of healthcare—are largely recession-resistant. With an almost 40% decline in the sector from last year’s high, we are likely to see increased takeover activity,” reports Andrew Addison for Barron’s.
Undoubtedly, consolidation speculation often tantalizes and disappoints biotech investors. Additionally, deal-making has been sluggish this year, but hope burns eternal, particularly amid recent news that Dow component Merck (NYSE:MRK) is moving on cancer biotech name Seagen (NASDAQ:SGEN) for $40 billion.
BBH, which tracks the MVIS US Listed Biotech 25 Index, allocates 5.33% of its weight to Seagen. That’s enough to have the ETF higher by almost 7% over the past week on the back of the Merck takeover rumor. Biotech stocks and BBH could also be beneficiaries of favorable technical tailwinds.
“Further evidence of the group’s strength is that volume flows have rocketed to new all-time highs (see above chart)—even as the Index is well below its 5500 price high from last year. This is evidence of strong buying pressure. I expect that biotechs are positioned to outperform the market for the balance of 2022,” says Addison in reference to a widely followed biotech index.
The ETF offers ample promise for long-term investors willing to wait out a BBH rebound. That potential could be amplified as biotech companies further refine advanced concepts, including precision medicine, platform-based therapeutics, new delivery methods, small molecules, immune-oncology, machine learning-based drug discovery, and more.
“Gene therapies have transformed patient treatment, offering, in some cases, excellent outcomes for genetic disorders. According to a McKinsey analysis of pharmaceutical industry data from Evaluate, roughly 400 gene therapies are currently in development; by 2025, they could comprise around 20 percent of new product launches. The field continues to evolve, with gene editing enabling permanent and precise genetic deletions and ex vivo modifications,” notes McKinsey.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
