Last week, news broke about an experimental cancer drug with an unheard-of 100% response rate. Although the trial was only 18 people, all of them had their tumors completely vanish.
Patients received the drug every three weeks for six months. The drug was a monoclonal antibody – the same technology we’ve been using to fight COVID-19 for the last couple of years.
And the results of the study were astonishing. In each patient, the cancer was undetectable by physical exam, endoscopy, PET scans, and MRI scans.
And patients stayed cancer-free for the last two years following the study.
This is amazing. And that’s not the only incredible advancement happening…
In May, another company announced it was beginning trials for its unique treatment – a cancer-killing virus.
Early tests show that this virus can reduce the size of lung, breast, ovarian, pancreatic, and colon cancer tumors. And the same characteristics that make cancer cells resistant to chemotherapy or radiation actually enhance the success of the virus.
This is futuristic stuff, and I really think it shows the direction of biotech. This is a rapidly growing field with impressive breakthroughs.
And with these kinds of astonishing advancements, who wouldn’t want to put their money toward these sorts of efforts? Yet as anyone who has been watching the biotech sector knows, it has been beaten down and left for dead in recent months.
So today, let’s take a look at the biotech sector and assess where this space could be headed in the future…
Beaten Down Biotech
Just take a look at the performance of the largest biotech index and the largest biotech ETF:
Each is down over 30% from its highs.
And the biotech sector has been beaten down across the board. Pre-revenue and revenue-generating companies alike have taken big dips. Even pharma giant Gilead Sciences (GILD) is down about 14% in 2022.
And there are a few reasons for this severe pullback, but they are not what you may think…
The biotechnology sector has had an interesting couple of years. The COVID pandemic pushed some biotech stocks higher than ever before, especially those working on vaccines for the virus.
But as the hype of the pandemic wore off, many biotech and early stage pharmaceutical companies fell back to earth.
The non-COVID part of the sector experienced canceled or delayed clinical trials due to lockdowns and social distancing. Naturally, attention and funding in 2020–2021 were focused almost solely on COVID.
This was then followed by a general sector rotation out of growth and higher-risk investments. We’ve seen a valuation compression that has led many stocks to tumble, regardless of their quality… and this has included the biotech sector.
But without biotech, many of the life-saving drugs we rely on today wouldn’t exist. Needless to say, the same goes for therapies of the future too.
And in many cases, biotech companies are now trading for less than the cash they have on their books.
In fact, of the 577 biotech companies I track using my system, 386 are currently trading below their cash values. That’s 66.9%! Two-thirds of these companies are trading at values lower than what they have in cash.
We’ve had a perfect storm to drive biotech down… but now this sector is looking like a bargain.
The Biotech Bounce
Stocks can’t stay at valuations like this forever. It’s just like I shared when the Big Money Index went oversold. Well-informed investors simply can’t stay away from good deals when prices for companies get so close to their valuations.
Sooner or later, investors come rushing back in to snatch up the good deals.
And this should happen with biotech very soon. Again, 66.9% of the biotech companies I track are trading at values lower than what they have in cash. That’s ridiculous. Investors can’t stay away from deals like this.
And on top of that, there are continually more and more diseases that need treatments and cures. Logically, this sector simply can’t go away. Our reliance as a society on medicine and technology isn’t going to just simply dry up. In fact, quite the opposite.
Modern medicine has been advancing at a record pace. Just think about how fast the entire world teamed up together to develop multiple vaccines and treatments to respond to the COVID-19 pandemic. Now, there are over 200 different COVID-19 vaccines being developed across the globe.
And if we look down the road 5–10 years from now, do we really think these companies are going to keep plummeting?
The Big Picture
Don’t believe the narrative that biotech is dead.
Even though biotech took a hit from big investor sell-offs, innovation doesn’t end. There are still companies developing incredible things, just like the two cancer drugs I spoke of earlier – and innovation like this just simply won’t stop.
And given how many biotech companies have been unfairly punished, many are now primed for a strong snapback rally.
As money moves back into biotech, we’re going to see more amazing things that are going to benefit us not only as investors but as a society. New drugs and treatments will ensure a better quality of life and health going forward.
And as an analyst, this is a sector I’m definitely keeping my eye on. As we head into the third and fourth quarters of this year, I expect capital to begin shifting back into these high-growth areas.
And when that happens, the pain in biotech will soon be a distant memory… Much like cancer for the lucky patients of the monoclonal antibody treatment trial.
Talk soon,
Jason Bodner
Editor, Outlier Insights
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