Biotech continues to lag the overall market –
As of today (November 18th 2021), XBI – the biotech ETF, is down -13% while QQQ is up 27% YTD and S&P500 is is up 25%.
Biotech is really living in a world in its own.
Today’s topic is about investing in biotech for 2022 as we think about asset allocation for next year.
“Should I invest in biotech in 2022?”
I say biotech is probably not the best area to park your money right now because of the market reaction to a large M&A today:
Novo Nordisk announced acquisition of Dicerna for $3.3bn with whopping 80% premium. This is a big deal and checked off many boxes of what investors are generally looking for in order to be convinced that the market sell-off left a lot of companies at highly attractive valuation for strategic buyers to pick up:
Dicerna stock price has been getting punished this year and got massive premium
As shown in below chart – Dicerna stock got SMOKED in August after announcing disappointing result from nedosiran.
The big jump was today’s move on announcement of acquisition – reflecting high premium nature of the asset. Usually investors like this type of deals because this usually signals that biotech market is cheap for strategic buyers – cheap enough for them to pay 80% premium.
Dicerna is a public company with a multi-bn exit
Some of the investor concern on this year’s M&A is that a lot of public companies have been left out of the M&A with most of the biotech M&A targets being private. Investors were getting concerned if public valuation for some of these companies is too lofty for large cap pharma to get involved. With Dicerna, we finally got a multi-bn $ M&A of a public biotech company.
HOWEVER BIOTECH DID NOT RALLY – IT CLOSED DOWN FOR THE DAY
Despite all the good things that should signal positive for biotech companies in general, biotech ETF actually closed flat / small down for the day!
It started up and then essentially bled throughout the day except for a bit. This price reaction tells me that investors really could not get excited about anything and many were looking to sell the strength.
INVESTORS JUST WANT TO GET OUT OF BIOTECH – THEY DON’T SEE THE NEED TO INVEST IN BIOTECH
As a sector, biotech needs big generalist (i.e. industry agnostic) interest and capital flow for the index to go up, and today’s reaction suggests that generalist capital continues to seek exit into more profitable areas in the financial market – like technology.
I don’t blame them – let’s compare 5 year return between tech and biotech
TECH RETURNED ~240% OVER THE PAST 5 YEARS
BIOTECH RETURNED ~85% OVER THE PAST 5 YEARS
When even the most positive event can’t turn around investor sentiment, I don’t know what will turn around the sentiment for biotech – capital outflow could continue with every good news being utilized as an opportunity to sell out of existing position and rotate into areas outside of biotech.
*not investment advice
