‘Biotech’s capitulation model is a Category 5 storm, which is the same as energy

If you want to know how much investors hate the biotech sector right now, consider these simple statistics: More than 25% of small biotech companies have stock-market capitalization that is less than their cash.

“The market is saying that a quarter of these companies are literally worthless,” said Michael E, a Jefferies biotech analyst who recently shared this insight.

It is significant. This 25% is the highest in 15 years – even more than the painful long bear market of the 2008 financial crisis.

Then, 18% cash down transactions. From 2010 to 2020, according to Ye and his team, the number bounced from 3% to 11% He is referring to small- and medium-cap (smidcap) companies with a market cap of less than 5 billion. These are the ones that have no earnings and have early stage therapy

“This is the worst drop of our career,” said Charmine Chan, a biotech analyst with Cambia Opportunity Fund CAMOX..
“No one has seen anything bad unless they have been doing it for over 20 years.”

For opponents, such extreme signals indicate only one thing. Sector A bought. While it’s hard to find any biotech experts in the group who are enthusiastic (even Yo warns), I’m not the only one who sees this as the opposite opportunity.

Biotech category 5 storms

Larry MacDonald, a macro analyst at The Bear Traps Report, agrees. To detect reverse buying signals, McDonald’s tracked a collection of capitalization markers he created during the 2008 crisis. They tell him when a sector is so despised that it is worth buying, in the opposite sense. It’s a “street blood” indicator, borrowed from an old Wall Street proverb that says we should buy stock if there is blood on the street. Its Capitulation Gauge tracks a number of technical signals, among other things.

“The Capitulation Model for Biotech is a Category 5 storm, similar to the 2020 Energy,” said McDonald. “The risk-reward is great, at least for a countertrend bounce.”

See how SPDR S&P Oil and Gas Exploration and Production Exchange-Traded Fund XOP
170% more than its 2020 midpoint.

McDonald’s SPDR recommends S&P Biotech XBI
And iShares Biotechnology IBB
ETF I recommend below six separate stocks with the help of Ye and Chan. MacDonald estimates that XBI could raise 20% to $ 83 in a short-term countertend rally, and possibly increase 30% year-over-year to $ 90 or more from now on. These targets are the 50- and 100-day moving averages.

Biotech experts disagree

Those who know the place better than me and McDonald’s are not on board. Yeah, who has been wary since last summer before the big fall, thinks biotech will be a challenge for years to come. “These wounds will take a long time to heal,” he said.

Nothing is broken about the science or potential for innovation inherent in biotech, he says. It is true that stocks may be cheaper for a longer period than you expect. “Why would anyone wake up tomorrow and say ‘I have to buy all my Smidcap biotech stock 50% less?’ It’s always hard to be the first in the swamp. “

“I think it will be a little sooner to be bullish,” agreed Cambier Chan. “You need a catalyst to change the narrative.”

Watch for progress on this front.

1. Further biotech integration and acquisition

“M&A will change the narrative, but it’s not happening,” Chan said.

There is a good case for this, though. “Big Pharma has enough cash to buy a whole smidcap universe,” he notes. Their growing cash balance has now grown to more than 300 300 billion.

“The big pharma CFOs are watching this murder, and they’re just licking their chops,” McDonald said. “You’re probably going to see significantly more transactions here.”

Yee expects M&A to grow slowly, but he’s less optimistic than McDonald’s. “M&A is tough when the market is falling fast,” he says.

2. The FDA gets its work together

From child formula deficiencies to drug-approval delays and horribly mixed signals on the way to approval, food and drug administration is a major source of problems and confusion for everyone from parents to biotech investors. “The FDA has become more unpredictable,” Chan said.

Well, it was necessary to focus on the scattering of the epidemic and vaccines and therapies. But now that Covid-19 is discontinued (hopefully), perhaps the FDA may re-focus on drug approvals.

3. Improving broad market conditions

Investors are panicking about inflation and recession because they know that the Fed proverb “Fed Put” (the stimulus to deal with a stock-market collapse) cannot come to the rescue.

As the Fed removes the wheel of training from investors, they need to think about inflation and GDP growth from themselves. So far, they are doing a bad job because it seems clear inflation has peaked and we are not going into recession. Hopefully, they will start work soon.

Consider stock… or avoid

Chan singles UCB UCBJY

A Belgian biotech company. Its shares hit hard in mid-May when the FDA asked for approval of its bimekizumab therapy for the treatment of a chronic inflammatory disease called plaque psoriasis due to some product inspection problems.

Now it needs to be re-applied, but the data seems to support bimekizumab. It has already been approved in Europe, Japan, Canada and Australia.

He preferred the possibility of two more UCB therapies in late-stage trials for neurological disorders: Zilukoplan and Rosanolixizumab. Expect more data readouts and applications for approval in the second half of this year, potential catalysts.

Yee single out Vertex Pharmaceuticals VRTX,
Destiny Therapeutics FATE
And Ventix Biosciences VTYX.

Vertex is posting strong revenue growth for its cystic fibrosis treatment Tricafta (up 48% to প্রথম 1.76 billion in the first quarter). It is also making good progress in pipeline therapy for cystic fibrosis, sickle cell disease, kidney disease, diabetes and pain. Its stock is down 14% from its April high of $ 292.75.

Fat Therapeutics stock has fallen 77% since August, although there has been no negative growth, Yeh said. Fate shows progress in the development of its natural killer cell immunotherapy for cancer. Fate does not have to raise capital anytime soon. It has a partnership with Johnson & Johnson JNJ
To develop cancer therapy.

Ventyx Biosciences develops therapies for inflammatory diseases such as psoriasis, arthritis, Crohn’s disease and colitis. It expects the main episode I trial data of the two of them over the next four months.

The companies are doing ‘free’ business

This is a precaution against buying companies that trade under cash only because their science can be bought technically for free. “They are probably suffering from negative events,” he said. But Olema Pharmaceuticals has its buy rating in OLMA,
Which has about $ 7 in cash per share.
($ 3.76 cash vs. $ 2.47 stock price).

Olema is conducting early-stage research into breast cancer therapy. LianBio helps partners study and develop their therapy in China. It has a deal with Bristol-Myers Squibb BMY,
For example, there is a cardiovascular therapy called Mavacamten, approved in the US, which he thinks is worth $ 13 a share of this China corner for Lianbio. It is partnering with other companies to develop therapies for inflammation, respiratory and eye diseases.

“We appreciate that attitudes towards Chinese stocks may be challenging, but the company has plenty of cash to run the pipeline and has ongoing trials with lead mavacamten assets,” Ye said.

Keep in mind that these are small sub-$ 300 million market cap companies that can be quite risky when it comes to biotech.

Vaccine stock

Modern mRNA,
Pfizer PFE
And Novavax NVAX
Far from the height seen in the concentration of the epidemic. But Yee warns against being too bullish on them. The reason: the epidemic seems to be receding and large vaccine buyers around the world are opting to purchase and delay shipments.

Michael Brush is a columnist at MarketWatch. He is the owner of VRTX and FATE and recommends VRTX, FATE, PFE, NVAX and OLMA in his stock newsletter, Brush Up on Stocks. Follow him on Twitter mbrushstocks.

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