Small-cap biotech stocks plundered after a 2021 wild-run, but investors are hopeful that interest rate cuts and positive test results in oncology and autoimmune treatments will be the right prescription for the biopharma market.
That would be welcome news for investors who have seen their stocks plunge as companies halted important trials amid scientific and regulatory concerns. Biotech company Rocket Pharmaceuticals plummeted 64% since 2021. Amicus Therapeutics, a Philadelphia-based biotech, is similarly down 53% from its 2021 high, and Omega Therapeutics stock fell by 91% since it went public in July 2021.
But the Federal Reserve’s half point interest rate cut this week is poised to make investors giddy to take a flier in these stocks. Investors are optimistic that more money will be invested in stock as the cost of investment falls, raising valuations for biotech companies.
Investor sentiment is “neutral to becoming more positive,” said Sean McCutcheon, an associate analyst at Raymond James & Associates. “Now stock reactions are more aligned.”
Flagship Pioneering, a venture capital company that invests in biotech, is looking to raise 3 billion for investment next year. Omega therapeutics also showed positive results with a dose escalation in clinical trials for their liver cancer drug using gene expression last month.
“I’m looking at all these little companies looking to raise money,” said Matthew Nachtrab, a biotech investor from Tampa, Florida. Nachtrab, who likes to buy in the dip, expects rate cuts and cancer treatment progress to bring price highs next year.
Much of his portfolio is tied up in biopharma aiming to treat Alzheimer’s and cancer among other autoimmune diseases. One of those companies is Cassava Sciences, a small biopharmaceutical company focused on neuroscience of which Nachtrab owns over 5%.
“I’m pretty bullish on biotechs in general,” said Nachtrab.
Pharma companies have long explored gene therapy as a way for drug discovery, but it wasn’t until the Covid pandemic that companies saw a funding boost. In 2021, Pfizer’s Covid vaccine was the first mRNA product to get full FDA approval in the US. Stock prices ballooned, and a flurry of biotech IPOs followed, with more than 100 IPOs taking place that year.
But some biotechs were more like “science experiments” that failed, said McCutcheon. Many companies flopped after initial cash from venture capitalists ran out and costly drug trials failed to break through FDA regulations.
“Valuation went low, but it is likely on the upswing,” said Robert Driscoll, senior vice president, Wedbush Securities about post-2021 small cap biotech.
Last year, 18 biotech companies filed for bankruptcy. Eiger BioPharmaceuticals, the maker of the Hutchinson-Gilford syndrome drug Zokinvy, is one of the most recent. After a wave of layoffs that sent 25% of its workforce home, the Palo Alto, Calif. company filed for bankruptcy when safety concerns over their hepatitis drug halted a late-stage trial.
Some companies still have not reported revenue. In its most recent 10-Q report, Rocket pharmaceuticals, a late stage gene therapies company, stated that it “has not generated any revenue and has incurred losses since its inception.” The company faced a recent regulatory setback from its drug Kresladi.
The tide is likely to turn. Excitement over promising treatments for weight loss, cancer and Alzheimer’s are stirring interest among investors again. A total of 18 biotech companies went public this year, raising over $1.3 billion in the first quarter, according to a Biopharma Dive database, after a two year lull.
“As interest rates come down you’ll start to see a backlog of companies going public,” said McCutcheon.
One of the companies his firm manages is Xencor, which develops antibodies to treat autoimmune diseases. It closed a public offering earlier this month that raised $200 million, and clinical trials showed promise for its renal cancer drug.
“What I’m seeing in cancer research is incredible,” said Nachtrab.