Almost all stocks from the healthcare industries took a beating in January as investors backed off from taking risks. However, the most hard-hit stocks were from the biotechnology segment. As per Bloomberg News, the Nasdaq biotechnology index has already fallen more than 14% this month, even as the broader market rebounded on Friday.
The high-risk, high returns company has the worst start this year since 2016, when Hillary Clinton, the presidential candidate at that time, had promised to rein in prescription drugs prohibitive costs.
As the market gets ready for Federal Reserve to hike interest rates, these companies are stung as investors shift towards safer havens.
Higher interest rates particularly impact growth stocks valuations, which will add more problems to existing concerns about drug pricing reforms, patent longevity, and stricter rules for mergers.
Sluggish start
This year’s beginning saw the worst start by Biotechnology index on Nasdaq since 2016. The valuations have fallen drastically, and about 100 odd biotech companies have cash reserves that exceed their market valuations. According to Truist, investors are strongly discounting these stocks’ growth outlook.
The impact is not only on those smaller biotechnology companies that have not yet rolled out any drugs in the market. Other firms such as Moderna Inc. saw a 37% fall in January, the steepest ever. They have become the worst performer in the S&P 500 broad-based index this month. BioNTech SE also faced a similar drop while competitors such as CureVac NV and Novavax Inc. have virtually been pruned to half.
In January, large-cap producers of drugs, scientific tools, and tests also slumped.
Hedge funds have been held as one of the culprits by strategists as some of them were forced to sell their holdings for redemption to investors who were disappointed and withdrew cash from funds. There are signs, however that biotech stocks are bottoming out. The equal weight SPDR- S&P Biotech ETF, listed under the XBI ticker, had plunged by 50% in seven months during Clinton fuelled meltdown before staging recovery towards the next advance. The biotechnology stocks have seen a similar drop in the past year, suggesting that it is due for a reversal.
Analysts at Jefferies Group Inc. said that the current sell-off had lasted longer than the earlier ones, which may imply that investors will take more time to regain their confidence in this sector.
