PINK - Healthy Outlook For Therapeutics
Summary
- Even in its battered condition, the therapeutics sub-sector still accounts for 9.1% of the Russell 2000 Growth index.
- M&A activity continues to heat up as big players—currently flush with cash—look to drive growth by filling their development pipelines.
- In our view, this confluence of factors could present a significant investment opportunity.
By Jennifer Blachford
With Big Pharma relatively well-capitalized and in a deal-making mood, we see the potential for a rebound for small- and mid-cap stocks in this innovative sub-sector.
Therapeutics stocks—under the weather for two years as macro headwinds have punished longer-duration investments—now appear poised for a potential recovery.
We believe therapeutics is a diverse and dynamic industry brimming with intriguing business models and underappreciated catalysts capable of generating significant alpha. Here are just few trends that could soon swing the momentum in investors’ favor:
- Valuations have broadly reset across this crucial growth sector: The SPDR S&P Biotech ETF ( XBI ) was down -20% in 2021 and another -26% in 2022. 1 Even in its battered condition, the therapeutics sub-sector—including companies providing biologic and pharmaceutical drugs aimed at treating a range of conditions, from the common flu to rare disease states—still accounts for 9.1% of the Russell 2000 Growth index (down from 19.1% just two years ago). 2
- The innovation pump is primed: Over 437,000 clinical studies are currently underway in 221 countries, including nearly 159,000 in the U.S. 3
- The FDA is under new leadership: We expect improved staffing and overall efficiency at the administration in 2023.
- Big Pharma is ready to deal: M&A activity continues to heat up as big players—currently flush with cash—look to drive growth by filling their development pipelines. After logging 109 deals 4 in 2022, the therapeutics sector looks poised for even more activity in the coming year.
- Balance-sheet strength does exist: The sub-sector’s solvency, in our view, is not as dire as overall sentiment suggests. While access to capital has gotten tighter, we estimate that approximately 70% of small- and mid-cap therapeutic companies (with market caps between $100 million and $30 billion) have sufficient cash to last at least 18 months. The challenge—and opportunity—for asset managers is being able to distinguish between the potential haves and have-nots.
In our view, this confluence of factors could present a significant investment opportunity—especially for active managers with the expertise to navigate such a complex and rapidly evolving sub-sector.
1 Morningstar
2 FactSet
3 Clinicaltrials.gov
4 thepharmaletter.com
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Healthy Outlook For Therapeutics