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The biotechnology sector, especially SMID-cap biotech equities, suffered a dramatic drawdown in 2021. Investor sentiment toward the sector remains poor, but my outlook has become increasingly bullish as multiple headwinds facing biotech over the past year or so begin to abate and turn into potential tailwinds for 2022 and beyond. Encouragingly, the level of innovation across the industry has never been higher, in my view. I believe many biotech stocks may be nearing a bottom, even though the exact timing of (and catalyst for) a rebound remains unclear as of this writing.
From its peak in early February 2021 through mid-February 2022, the SMID-cap biotech-dominated XBI Index was down 49%, lagging both the broader health care sector and the overall US equity market by sizable margins. The underperformance was deeper and lasted longer than any prior drawdown since the inception of the XBI Index in 2006. Bigger-cap biotech stocks also underperformed over the same trailing 12-month span, although not as severely as their SMID-cap counterparts.
A slew of challenges weighed on the biotech industry last year, including regulatory uncertainty, drug pricing worries, excessive numbers of new IPOs, a relative dearth of M&A deals, and generally frothy equity valuations. More recently, the widespread expectation of rising interest rates has loomed large as the US Federal Reserve (Fed) prepares to begin tightening monetary policy amid higher inflation.
However, I believe most of these headwinds are abating and (in some cases) even transitioning to tailwinds for 2022 and beyond, underpinning my bullish outlook for the industry.
After a trying period over the past year or so, I believe now may be an opportune time for forward-thinking equity investors to take a fresh look at the biotech sector.
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