Market decline

Here’s why clinical-stage biotechnology hit hardest in a market decline

BIotech investors are probably a little depressed, with industry valuations falling since their peak in February. In this video by Motley Fool Live, registered on March 8, contributors Brian Orelli and Keith Speights, explain why early stage small businesses were particularly hard hit during the recession.

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Brian Orelli: First off, let’s talk about the tough biotech week and the past two tough weeks. We had a bit of a rally on Friday, but the tech-rich Nasdaq was down about 2%. But the IShares Nasdaq Biotechnology ETF (NASDAQ: IBB), which is the market-cap-weighted biotech ETF, fell 4%, and another biotech ETF called the SPDR S&P Biotech ETF (NYSEMKT: XBI), which is evenly weighted so small businesses count more, fell 6% last week.

Some companies particularly affected this week. Novavax (NASDAQ: NVAX) was down 24%, Vir Biotechnology (NASDAQ: VIR) was down 28%, Ocugen (NASDAQ: OCGN) was down 20%. Do you have any idea why, at the clinical stage, biotechnologies are particularly affected?

Keith Speights: Yes. I mean, some of them fell for a good reason, not just the stock market sell-off. For example, Vir Biotechnology stock plunged after the company announced disappointing results from an advanced study of antibody therapy it is developing with GlaxoSmithKline, and this antibody therapy targets COVID-19. Some concerns were raised in the analysis regarding the potential benefit of this particular therapy. So there was a good reason why Vir stock fell in particular.

But other companies actually got some good news and still fell. For example, Ocugen, their partner, Bharat Biotech, announced an efficacy of 81% for their COVID-19 vaccine, Covaxin. These are very good results there. Ocugen and Bharat are working together to hopefully bring this vaccine to market in the United States if all goes well. But Ocugen stock, as you said, still fell 20%, even with good news.

I think the main reason clinical-stage biotech stocks have been particularly affected is that they trade at prices that are really totally up to investors. Biotechs established with products in the market generating sales, these kind of businesses, investors can watch them, they can watch their business, they can see how sales are increasing for their existing products, they can watch their pipelines, and they can come up with a more reasonable, I guess, estimate of their valuation. But it is much more difficult to do this with a stock of biotechnology at the clinical stage. It all depends on what you think about their potential, and when investors are in a bitter state of mind, which happened last week, these stocks are going to be hammered, and that’s exactly what we’ve seen. .

Orelli: The other problem is that they will be based on future earnings and then discounted for a risk-adjusted discount, meaning that when the price of interest rates goes up, you are now talking about risk-free or less risk. . risk. You get more for these when interest rates go up, and therefore you have to factor that into the valuation, causing valuations to go down.

Speights: Exactly. This impacts all stocks. But this particularly affects the more speculative stocks, biotechnology stocks at the clinical stage are simply more speculative in nature.

Brian Orelli, PhD owns shares of Novavax. Keith Speights owns shares of SPDR S&P Biotech. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.