NEW YORK, Oct 15 (Reuters) - Sluggish U.S. biotech shares
could require a wave of deal-making or exciting clinical trial
results if the sector wants to join the stock market's party
after lagging Wall Street's broad advance this year.
More certainty about the direction of prescription drug
regulation, including the prospects for tougher pricing
legislation, also could bolster the stocks.
An index of S&P 500 biotech companies is up 2%
so far in 2021, while the overall S&P 500 has gained more than
18%. A closely watched ETF that better measures small and
mid-cap biotech companies -- the SPDR S&P Biotech ETF --
is down nearly 10% for the year, and 27% from its high reached
About $2.5 billion has flowed out of healthcare ETFs on a
net basis since Aug. 31, or about 3% of total assets of those
funds, according to Jefferies strategist Steven DeSanctis. In
the week ending Oct. 6, the SPDR biotech ETF saw its biggest
weekly outflow on record, according to Refinitiv Lipper data.
After a strong 2020 particularly for smaller biotech stocks,
investors said the group was due to back off. But biotech shares
have been lost in broad investment themes this year, market
They cited a tug-of-war between stocks expected to shine in
an improving economy, such as energy and banks, and big tech and
growth shares that strengthened during economic unease.
It seems like healthcare, and biotech specifically, is sort
of in no mans land on a year-to-date basis, DeSanctis said.
The swings in the market have either been, I want to own
cyclicals and or I want to be defensive.
Among large biotech stocks, Amgen, a member of the
Dow Jones Industrial Average, is down 10% so far in 2021,
while Vertex Pharmaceuticals has slumped 23%.
The S&P 500 biotech index trades at price-to-earnings ratio
of 10.2 times forward earnings estimates, a 50% discount to the
S&P 500's P/E ratio of 20.4, according to Refinitiv Datastream
When you look at the large caps, the growth opportunities
and the prospects there are a lot more in question than they
have been historically, said Marshall Gordon, senior healthcare
analyst at Clearbridge Investments.
For smaller companies, investors often look for a pickup in
acquisitions to help improve biotech valuations. Healthcare
companies are sitting on almost $500 billion in cash, a record
amount, according to Jefferies analysts.
"If we start to see more M&A, that should help trigger more
positive sentiment around the space, said Sahak Manuelian, head
of equity trading at Wedbush Securities.
Not all biotech stocks have struggled this year. Shares of
COVID-19 vaccine makers, Moderna and BioNTech,
have surged more than 200% so far in 2021.
But recent industry setbacks could be souring sentiment:
Biogen's new and controversial Alzheimer's treatment
has had an uncertain launch, Apellis Pharma shares
tumbled following disappointing data for its experimental eye
drug, and U.S. regulators placed a hold on studies of Allogene
Therapeutics' cancer medicine.
Data in coming months from major medical conferences,
including a hematology meeting in December, could reinvigorate
interest in biotech, Manuelian said.
Regulatory obstacles also persist. SVB Leerink analyst
Geoffrey Porges said in a note this week that it was "difficult
to see" a broad rally in the biopharma group in part because of
"the enduring overhang of drug pricing regulation risks, which
in our view is likely to last until the end of the year."
Uncertainty about the Food and Drug Administration, the
industry's main regulator for which President Biden has yet to
nominate a permanent commissioner, may also be clouding the
investing environment, investors said.
"There have been a number of regulatory decisions that have
been surprising," Gordon said. "There are concerns that FDA is
either getting harder or is just less predictable."
(Reporting by Lewis Krauskopf; editing by Megan Davies and