Biotech acquisitions were supposed to breathe life back into the sector, but despite the biggest deal so far this year, this has been yet another no-good, very bad week for the stocks.
The end could be coming soon, in a painful but positive way, according to Exome Asset Management senior investment analyst Sameh Ahsan. He sees a chance for a recovery beginning in the middle of next month, after the rebalancing of the Russell 2000 index allows specialist biotech funds to sell off some of the worst-performing stocks in the sector.
The most-watched biotech exchange-traded fund, the
SPDR S&P Biotech ETF,
was down 37.4% on the year at the start of the week. At the end of trading on Thursday, the loss had grown to 42%.
That is despite a big dose of long-awaited biotech M&A , in the form of
Biohaven Pharmaceutical Holding
(BHVN), the maker of the migraine drug Nurtec ODT. The
SPDR S&P Biotech ETF
(XBI) rose 5.2% on Tuesday, the day of the deal.
The next day, however, it got slapped down again after
(RHHBY) announced disappointing results in a Phase 3 trial of an experimental cancer drug known as tiragolumab. Tiragolumab is the farthest along in a large group of similar drugs, known as anti-TIGIT therapies, so the news sent down shares of
(ITOS), among others, which are developing their own anti-TIGITs.
The XBI fell 7.2% on Wednesday. It rebounded a bit on Thursday, but ended the day at $64.91, down from $70.13 the previous Friday. It rebounded slightly on Friday morning, up 3.9% to $67.41 in morning trading.
Analysts have said that it will take time, and a string of deals and positive data, to fix what ails biotech. In an interview this week, Exome’s Ahsan offered a more concrete turnaround point: He said that he expects biotech stocks to have a chance to recover this June, after the
The Russell 2000, which tracks small-cap U.S. stocks, includes more than a hundred biotechs. “If you look over the past like three, four years, healthcare has become a much bigger part of the Russell 2000,” Ahsan said. A wave of IPOs has brought an extraordinary number of small biotechs into the public markets.
The number of biotechs in the Russell 2000 could shrink dramatically this June, however, when the index goes through its annual rebalancing. Stocks that no longer meet the minimum market capitalization will be removed.
Last year, no companies with a market capitalization below $257.1 million were allowed into the Russell 2000. The selloff of the past year has driven the market values of around 80 biotechs currently in the Russell 2000 below that level.
“A lot of these names are now going to be exiting,” Ahsan said. “I think that will be a volume motion that will probably send the sector down even more, but that will also be that washout period that’s needed to get some of these names off the books.”
Ahsan says that specialist healthcare investors are effectively stuck holding some of the most distressed small-cap biotech stocks, which have little liquidity. He expects that their removal from the Russell 2000 will create trading volume in the stocks, allowing biotech specialists to sell, taking the loss but freeing up capital to commit to biotechs with better prospects.
“[As] the Russell unwinds these positions, it creates enough volume for the specialist funds to exit that position, because right now they can’t even sell,” Ahsan said. He predicted that retail investors, among others, will buy up the distressed biotech shares as they get knocked off the Russell 2000.
Biotech, more than other sectors, is traded heavily among highly-specialized investment funds. With those funds tied up in troubled biotech stocks they can’t sell, there is less money to spend on promising biotechs.
A washout, Ahsan said, would leave “more capital to spend on real companies.”
FTSE Russell, which manages the Russell 2000, has said that it will announce “preliminary” additions and deletions from its indexes on June 3. It will complete the reconstitution after the market closes on June 24.
Write to Josh Nathan-Kazis at firstname.lastname@example.org