Investors back the SPDR S&P Biotech ETF as the sector booms

Biotech stocks saw their valuations sink as the number of patients experiencing Covid-19 complications fell. But now that these stocks are at a bargain price, investors are returning to the sector in the hopes that they will be able to strike gold by providing treatments for other illnesses.

The SPDR S&P Biotech ETF [XBI] has soared by nearly 31% since 9 May to $84.43 at the close on 8 July. This recent rise marks a turning point from the 43% decrease the ETF experienced between the start of 2022 and 9 May as it was blasted by the fading of the Covid-19 pandemic.

The biotech sector had a strong showing during the pandemic as experts sought drug, diagnostic and vaccine solutions for Covid-19, and funding piled in to existing and new stocks. The success of the vaccines and the promise that biotech could unlock the key to finding treatments for both new pathogens and existing diseases such as cancer kept the sector buoyant.

However, as Covid-19 fatalities began to slow, so too did investor appetite in the sector. The industry has also been hit by higher inflation, interest rate hikes and fears over the global economy sparked by the Russian invasion of Ukraine. That has made investors more concerned about investing in growth and early-stage stocks — especially the inherently risk-on biotech sector — and turning to value instead.

The price is right for biotech?

As a result, valuations have fallen, as seen by the SPDR S&P Biotech ETF’s fall over the first four months of this year.

“This is the worst correction [in the biotech sector] I have seen in my 22-year career,” Michele Gesualdi, founder of London-based investment group Infinity Investment Partners told the Financial Times. “We have never seen stress like this. The sector is as cheap as it has ever been.”

Meanwhile, Philippe Wolgen, chief executive of Australian biotech Clinuvel Pharmaceuticals, said that following the sector’s “catastrophic” plunge, fund managers “are openly expressing their aversion to perpetuating these risky ventures”.

But it seems a bottom was reached around May, when investors started paying attention to the low valuations and began looking for bargains.

Denise DeMan, writing in PharmaExec.com, said: “Depressed prices may entice larger life sciences companies to buy up newer startups, giving them innovation as well as an attractive exit for investors.”

The emergence of new Covid-19 strains and rising hospitalisation numbers has also led to the re-appreciation of the importance of the biotech sector in an era of globalisation and climate change.

The SPDR Biotech lowdown

The SPDR S&P Biotech ETF is benefitting from this revival. The ETF aims to provide investment results that broadly mirror the performance of the S&P Biotechnology Select Industry Index.

Launched in 2006, it has assets of $7.8bn and a year-to-date total daily return of minus 24.5%. It has 135 holdings, of which Novavax [NVAX] has the top weighting at 1.72%, followed by Twist Bioscience [TWST] (1.45%), Beam Therapeutics [BEAM] (1.45%) and Global Blood Therapeutics [GBT] (1.42%).

The Novavax share price has climbed 109.8% since 13 June to around $76.12 on 8 July on the hopes that its long-awaited Covid vaccine will soon be administered in the US. It came after the US Food and Drug Administration Vaccines Advisory Committee recommended that the FDA grant emergency use of the Novavax Covid-19 vaccine for people aged 18 or over.

The Global Blood Therapeutics share price has jumped 51.9% higher since 11 May (through 8 July). In the first quarter of 2022, it recorded net sales of $55.2m for its sickle cell disease treatment Oxbryta, up 41% year-over-year. The net number of patients taking Oxbryta increased compared with the prior quarter and has increased each quarter since its launch in 2019.

Demand for biotech stocks surges

Demand for such treatments is expected to stay healthy in the years ahead. According to a report from Polaris Market Research, the global biotech market is set to climb at a compound annual growth rate of 15.6% between 2022 and 2029.

“Increasing awareness regarding the broad application of these technologies, such as human and animal nutrition, environmental protection, drug development, along with agricultural improvements are expected to drive the biotechnology market growth over the forecast period,” it said. “Furthermore, the Covid-19 outbreak has led several organisations to invest in the research and development of novel drugs for the future crisis, which in turn is expected to drive the biotechnology market growth over the forecast period.”

The momentum looks strong, but investors need to be cautious given those global economic woes, supply chain squeezes and Covid moving from pandemic to endemic. As DeMan writes in PharmaExec.com: “Investors are going to be more discerning of companies to back, particularly those years away from profitability.”