- Biotechnology
- Global Industry Analyst
Singapore, Intermediary
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
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.
A challenging 2021 for biotech sector
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.
Reasons for optimism going forward
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.
- FDA turmoil: The recent US Senate confirmation of Robert Califf as FDA commissioner was a positive development, in my opinion. I expect Dr. Califf to be a stabilizing force and a morale booster for the FDA staff, which has been under enormous strain due to the COVID-19 pandemic. In addition, reduced workloads related to COVID vaccines and therapeutics should enable FDA staff to focus more on non-COVID drug approvals and other priorities.
- Drug pricing concerns: The worst-case scenario in US drug pricing reform entering 2021 — that sweeping legislation might lead to across-the-board, draconian price cuts — now appears to be off the table in the foreseeable future. Given the latest setbacks to the “Build Back Better” legislation, my base case is that no drug pricing reform will be enacted in 2022 (or even in 2023/2024). Another possibility is that some form of Medicare Part D benefit redesign and limited drug price negotiation could pass this year, from which the biotech industry as a whole would likely benefit.
- Excessive numbers of IPOs: There were 82 biotech IPOs in 2021, compared with 69 in 2020 and 41 in 2019. Many of these companies were years away from the clinic and even further from generating derisking data or having drugs ready for regulatory review. In other words, many of these companies had no business going public. The good news: I expect to see a meaningful drop-off in the number of biotech IPOs this year. To wit, there have been only four so far, three of which are clinical-stage companies.
- Relative dearth of M&A: Both the number and size of M&A deals transacted in 2021 were lower than in prior years, which may have been due to: 1) many sellers remaining wedded to unrealistically high valuation expectations from 2020; and 2) many buyers exercising greater caution around Federal Trade Commission (FTC) scrutiny. But sellers’ lofty expectations may be resetting in 2022, while many buyers are now flush with cash and may become more comfortable working within existing regulatory constraints. (That bears watching.)
- Frothy equity valuations: Coming out of the initial “COVID dip” in March 2020, biotech valuations were bid up to historic highs later that year, as many generalist investors bought into innovative cures and treatments for various diseases. Then investor fund flows sharply reversed in 2021, moving from biotech and other COVID “winners” into COVID “losers” amid the reopening trade. Consequently, SMID-cap biotech valuations had corrected by roughly 50% as of early 2022, with several analyses suggesting they may now be close to bottoming.
Bottom line on biotech stocks
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.
Expert
Related insights
Showing
of
Insights Posts
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Read next
Showing
of
Insights Posts
Equity Market Outlook
In our Equity Market Outlook, we offer a range of fundamental, factor, and sector insights.
Article
2025-12-31
Time to get active? 5 equity investment ideas for 2025
As we head into 2025, growth seems poised to accelerate, especially in the US. Equity Strategist Andrew Heiskell and Macro Strategist Nicolas Wylenzek see five themes that may create opportunity across global equity markets.
10
min
Article
2025-12-31
Strong fundamentals, attractive valuations: Why the time may be right for active biotech investing
From solid fundamentals to supportive macro conditions, learn why our biotech experts believe the industry may be ready to run.
8
min
Article
2025-10-31
Beyond US large cap: Where now for equity investors?
How should investors navigate a narrow market? Looking ahead to the rest of the year, Macro Strategist Nicolas Wylenzek examines the structural backdrop and Equity Strategist Andrew Heiskell shares his view on equity opportunities to watch.
9
min
Article
2025-06-30
How to translate a critical concept into return potential
How to translate the critical concept of stewardship into rewarding returns? Portfolio Managers Mark Mandel, Yolanda Courtines and Sam Cox share their firsthand experience.
Article
2025-02-28
Quality value: getting (more than) what you pay for?
Quality and resilience often go hand in hand, but resilience measures future quality. How can resilient companies offer value to long-term investors? And how can investors identify them?
Article
2025-03-31
Will a “Goldilocks” economy be just right for equity markets?
We provide an outlook on the ongoing shift to new investment regime, and the market segments that we expect will most heavily influence global equity performance in the coming year.
Article
2024-12-31
Building resilience: Key questions equity investors need to ask today
Yolanda Courtines explores how equity investors can re-assess the resilience of their core portfolio against higher interest rates and more adverse macro conditions.
Article
2024-08-31
Why investing in themes for EM equities may reap rewards
Portfolio Manager Dáire Dunne outlines why he is increasingly optimistic about the potential opportunities within select EM equity themes this year.
Article
2024-02-29
What does an equity market bottom look like?
Applying a historical analysis to today's market, Multi-Asset Portfolio Manager Nick Petrucelli believes US equities have not yet found a near-term bottom.
Continue reading
Quick Take
2022-11-30
Mid-2022 Asset Class Outlook
We offer perspectives on growth and value equities and explore ideas for shoring up your fixed income flank amid the evolving economic and market environment.
Continue reading
Article
2023-07-31
URL References
Related Insights
Equity Market Outlook
Continue readingBy
Andrew Heiskell
Nicolas Wylenzek