As the new year looms, biotech stocks are hot, but hardly frothy.
The Nasdaq Biotechnology Index (NBI) has gained about 25% this year. The majority of those gains have come since October, and the index has outperformed the market by 13 percentage points over the past three months.
That is a source of potential concern, given that a presidential election is less than a year away. Back in 2016, harsh campaign rhetoric about drug prices from all leading candidates slammed stocks across the sector.
The memory lingers, but there is reason to believe that history won’t repeat itself. For starters, the index is still well below the record high set in 2015. The S&P 500 (.SPX) has rallied about 50% over that same time frame. And while the most recent presidential election was a negative experience for investors, the sector didn’t underperform in 2012 or even 2008.
Meanwhile, sector fundamentals are strong. The Food and Drug Administration has approved 48 novel drugs so far this year, which is high by historical standards.
Just as important, big pharmaceutical companies continue to spend heavily on deals of all sizes. Bristol-Myers Squibb (BMY) bought Celgene for $74 billion in cash and stock this year, and AbbVie (ABBV) announced a deal to acquire Allergan (AGN) for $63 billion. After frosty initial reactions from Wall Street, shares of both acquirers have since rallied.
Smaller deals are commanding fancy valuations. In deals announced just this month, Astellas Pharma (ALPMY) bought gene therapy specialist Audentes Therapeutics (BOLD) for $3 billion, Merck & Co. (MRK) acquired cancer startup ArQule (ARQL) for $2.7 billion, and Sanofi (SNY) paid $2.5 billion for Synthorx (THOR). All three deal prices represented at least a 100% premium from the previous trading day. More deals might be announced in January, ahead of a major investor conference.
This trade certainly isn’t foolproof. Biotech shares would be unlikely to hold up in a wholesale market correction. And a surprise win by a progressive Democrat in Iowa or New Hampshire could still rattle investors.
But the potential upside is as clear as those risks. Don’t be surprised if investors’ bad memories of 2016 start to fade away.
|For more news you can use to help guide your financial life, visit our Insights page.|