Biotech investors: how to find value in a bear market
How are top investors navigating the longest biotech bear market in almost 20 years? RBC Capital Markets Healthcare Desk Sector Strategist Chris McCarthy discusses key fundamentals, macro-awareness and the continued impact of COVID with HealthCor’s Ben Snedeker and Omega Funds founder Otello Stampacchia.
Picking biotech winners
Biotech indexes may be down, but both Snedeker and Otello Stampacchia, Ph.D., Founder and Managing Director of Omega Funds, see opportunities in the market. In Snedeker’s opinion, investors need to seek out companies with the potential for meaningful revenue growth, particularly those that are mispriced in the current bear market.
“Investments still need to be fundamentally driven – companies with outstanding products, excellent innovation, a track record of success, management teams with a strong execution track record, the ability to communicate effectively, companies that are well-funded and match up against important themes that we see from a disease perspective. All of that remains absolutely true,” he says.
“We’re going to remain fundamental investors, focused on individual companies within the healthcare ecosystem, but that all needs to be viewed through the lens of being macro-aware.”
Stampacchia also believes in fundamentals and in looking at development pipelines.
“Where we spend a lot of time internally is clinical trial development strategy and competitive analysis. I’m extremely proud of the fact that we invested in companies that have launched 47 products, which is quite unprecedented in our segment of the industry, and with each of those drugs and products come learnings that we apply throughout our investment strategy. So having a certain amount of staying power, if you will, in the industry, I think it’s disproportionally impactful,” he says.
The continuing impact of COVID-19
It’s something of an irony that biotech innovation created the vaccines that brought the world out of the COVID-19 pandemic, but the sector is trading down right now. The effects of the pandemic have been varied and will be felt for a long time to come, both positively and negatively.
“There’s been an incredible focus shift from academics on research into this virus and it’s giving a ridiculous amount of insight into how our immune system works in interacting with viruses and with host factors,” Stampacchia points out.
“So I think the dividends from this research, not just for antiviral research, but for autoimmune and rare diseases, is going to be phenomenal. And I really think there’s been a massive step up in the pace.”
The speed with which companies innovated, regulatory bodies approved, and manufacturing and distribution ramped up was another coronavirus phenomenon, but the after-effect is that some investors and companies expect that pace to be the new normal.
“Accelerated pathways to market, accelerated ramps in product launches, very rapid moves toward substantial revenue potential for newly launched products – I think these are all dynamics that are currently believed to exist in the market because of what we saw from coronavirus and how it changed our outlook on how industry can take a product from early innovation all the way to market,” says Snedeker.
“We need to recognize that a product being developed for important diseases, but not necessarily for global pandemics, is going to have a different path to market than what we saw for pandemic therapies.”
Banishing the bear
In the long term, the best indicator of outperformance in the therapeutic sector is revenue growth, but in the short term, it’s fund flows. That, according to Snedeker, is part of what’s at the heart of turbulence in biotech shares in the last few years.
“From 2019 to early 2021, you were seeing incredible fund flows into therapeutics, an incredible number of new listings, so we saw a really meaningful increase in that short-term outperformance based on those fund flows,” he said.
“The challenge has been that we weren’t able to convert that explosion in fund flows into an opportunity to start to see meaningful, long-term revenue growth.”
As the market adjusts to the post-pandemic world, Snedeker isn’t expecting another surge for biotech stocks.
“What you see following a bear market is a slow grind back. You have a few companies that lead the way initially, others start to a catch up. Sometimes there are elements, things like M&A activity, but that’s really more the exception than the rule in terms of how bear markets end,” he says.
But that’s not to say that investors can’t find what they’re looking for in the markets today.
“There’s a lot of opportunities in the public markets right now. There’s, I believe, over 120 companies that are trading below cash and at some stage that is in an efficiency that needs to be arbitraged out,” says Stampacchia.
Gain perspectives from the cutting edge of biotech to help you lead today and define tomorrow. Explore RBC’s Pathfinders in Biopharma series.