The Correction In Biopharmaceutical Stocks Is Likely Over

May 18, 2022 12:51 AM ETBEAM, BNTX, CRBU, CYRX, DHR, DHR.PB, DXCM, LLY, MRNA, NTLA, PFE, REGN, RGEN, SWAV, TMO, TNDM, XBI17 Comments9 Likes
Leonard Yaffe profile picture
Leonard Yaffe
2.28K Followers

Summary

  • Biopharmaceutical stocks have undergone a dramatic correction over the past six months, with the XBI declining by 45%.
  • The decline was appropriate, given the number of companies that went public in 2021 with preclinical data and a valuation exceeding $1 billion.
  • Not only would these companies not be on the market before 2027, but the cash burn suggested that additional financing would be needed.
  • With stocks across all of healthcare, with the exception of large-cap pharmaceuticals, dramatically lower, there are stocks attractively priced.
  • Additionally, with the stock declines, analysts are lowering price targets (which had been too high), creating, in my opinion, additional selling pressure. The short interest is high in many stocks.

Stethoscope with financial statement

shansekala/iStock via Getty Images

The decline in healthcare stocks over the past six months is multi-factorial, and includes the interest rate environment. As it relates to biopharmaceutical stocks, the primary reason, in my opinion, was the excess speculation in 2021 that led to IPOs that should not have occurred, as the companies were not in clinical studies, at valuations that were lofty. These excesses have been wrung out, and I maintain it is time to aggressively buy stocks of companies with excellent prospects. It remains a stock picker's market, but the difference is that the valuations are attractive.

I have been recommending the COVID-19 stocks for two years, as I maintain that SARS-CoV-2 will remain "flu on steroids" for years. As new subvariants arise, that are more transmissible though fortunately likely less virulent, the need remains for vaccines and therapeutics. I believe that analysts forecasts for Pfizer (PFE), BioNTech (BNTX), and Moderna (MRNA) are too low, and I note that the latter two companies are not given credit for their impressive pipelines. In that regard, Moderna should have vaccines against fifteen priority pathogens in clinical study by 2025. BioNTech expects to begin four infectious disease clinical trials and three oncology clinical trials, in addition to having three data updates, including its influenza vaccine, in the near future. It must be noted that the P/E, based on 2022 EPS estimates, or Moderna is 6x, and for BioNTech, 5x. Finally, Pfizer is ideally positioned with both a vaccine and therapeutic, and its stock sells for a P/E of 8x.

Taking a long-term view, looking back 30-60 years, drug discovery was largely based on medicinal chemistry and resulted in the development of small molecules. Over the past twenty years, there has been a dramatic shift to biotechnology, and now, cell and gene therapy. In fact, Danaher (DHR) management stated on its recent first quarter conference call that, over the past five years, clinical trials involving monoclonal antibodies have increased by 50%, and those with cell and gene therapies, by 1000%. Stocks to buy based on this research renaissance include Regeneron (REGN), Beam Therapeutics (BEAM), Intellia (NTLA), Caribou Biosciences (CRBU), Danaher, Thermo Fisher (TMO), Cryoport (CYRX), and Repligen (RGEN).

Finally, while several of these stocks have not corrected significantly, one should always own the great companies. In large cap pharmaceuticals, the best positioned company is Eli Lilly (LLY), with both its COVID-19 therapeutic and recently approved Mounjaro for adults with Type 2 diabetes. In medical devices, Shockwave Medical (SWAV) is revolutionizing treatment of calcified arterial lesions with its intravascular lithotripsy system. DexCom (DXCM) and Tandem Diabetes (TNDM) are allowing many more diabetic patients to achieve superior glucose control with their sensors and pumps, respectively.

The recent correction in the stock market, which was very pronounced in the biopharmaceutical subsector, has left many stocks attractively priced. As discussed, the "class of 2021 IPOs" were both overvalued and too early in drug discovery. This reflected the increase in speculation that pervaded at the time. With valuations now more appropriate, I maintain that the opportunity to own the stocks of promising companies is at hand.

This article was written by

Leonard Yaffe profile picture
2.28K Followers
I am an MD by background who runs a healthcare hedge fund. I worked as a sell-side medical analyst for 20 years, covering pharmaceuticals, medical devices, PBMs and drug distributors.
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Disclosure: I/we have a beneficial long position in the shares of TNDM, CYRX, DHR, REGN, MRNA, PFE, BNTX, SWAV, LLY, NTLA, BEAM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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