We kicked off trading in December Thursday as 2022 rapidly comes to a close. The market has not been kind to the biotech sector in 2022 a statement that can be made about most areas of equities in what has been cruel year for investors.
So, as we look to turn the page on 2022, what is ahead for biotech in the new year? Here are a few things I think about the sector in 2023.
As I noted in my column Wednesday, it would not surprise me at all if stocks got off to a rough start in the first half of 2023. Rising interest rates are having painful effects on many parts of the economy, and a recession at some point in the coming year would appear to have a high probability. That said, I think the lows the biotech sector established in mid-June of this year will hold throughout 2023.
There are several reasons I believe this.
The biotech sector, represented by the SPDR S&P Biotech ETF (XBI) , bottomed at the same level that has been a floor for the sector for many years (see chart above).
Second, the fizz from the Covid plays that powered the sector, starting after the lockdown lows in 2020 through the first part of 2021, has been completely burned off. One can take a look at vaccine-play Novavax (NVAX) to see how volatile that move was:
What's more, there was a massive amount of new supply that came on the market in 2021 thanks to a boom in biotech IPOs and the SPAC craze, powered by the easy money policies of the Federal Reserve at the time. However, as rates have risen, that source of new supply has slowed to a crawl, which is supportive of currently public firms.
I also think M&A in the sector will pick up noticeably after being largely dormant over the past few years. Big Pharma is flush with cash and names such as Pfizer (PFE) , AztraZeneca (AZN) and Moderna (MRNA) need to continue to deploy some of their Covid lucre to expand their pipelines and product portfolios as vaccine revenues are ebbing. There has been a lot of speculation recently about the possible buyout of Horizon Therapeutics (HZNP) , which would be a north of a $25 billion purchase.
One last word and I continue to stress this caveat. Investors should peruse the balance sheets of any potential small and midcap biotech investments before establishing any new stakes. Financing has become harder to come by over the last year as the credit markets feel the impact of monetary tightening. I am only looking at names that are either already profitable or have 24-36 months of cash on hand for their projected burn rates.
