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.

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Chris McCarthy

Healthcare Desk Sector Strategist, RBC Capital Markets