When will smid-cap biopharma (e.g., XBI) stock prices start to increase again?

When will smid-cap biopharma (e.g., XBI) stock prices start to increase again?

Maybe when the biggest drivers for the downturn end or even reverse?

So what are these 2 major drivers?

1. US Federal Reserve interest rate increases

2. U.S. Congress threats/action re: drug price controls/reform

Here’s some background on the downturn, to help us understand why we think especially item 1, and to a lesser degree, item 2 are the main drivers.

It’s been tough since 2021 for biotech investors (See FIG. 1) 😒

FIG 1. XBI stock price

Red bar - $66.92 XBI close 10/20/23

Purple vertical bar is start of 117th U.S. Congress

We may be heading for 3 consecutive double-digit negative XBI years.

• XBI 2023 ytd (10/20/23) -19%

• Before 2022, we never had even 2 consecutive neg XBI years 📸

FIG. 2. XBI Annual Returns since 2007. Source: Yahoo Finance, 2023

Let’s look at 1 and 2 more closely with respect to this downturn:

1. Interest Rates

• Biotech stock prices are INVERSERLY affected by interest rates

  
  

  ○For general info on how the Fed sets interest rates, see this article from Rocket Mortgage.

  
  

  ○The U.S. Federal Reserve has been increasing interest rates since March 2022. (See FIG. 3) 📸

FIG. 3. U.S. Fed Reserve interest rate decisions since March 2022

○But biotech stocks have been dropping since Jan 2021?

○Interest rates anticipate Fed Reserve moves

○Interest rates have been increasing since 2nd half Dec 2020 (See FIG. 4B) 📸

○INVERSE RELATIONSHIP of XBI vs. 10-yr U.S. Treasury bond yield illustrated in FIGs. 4A & 4B 📸

FIG. 4A. Graph of XBI vs. 10-yr U.S. Treasury bond yield (Since 2006)

10-year U.S. Treasure bond rates (top) vs. XBI (bottom)

Purple vertical bar is start of 117th U.S. Congress

FIG. 4B. Graph of XBI vs. 10-yr U.S. Treasury bond yield (Since 2014) 

10-year U.S. Treasure bond rates (top) vs. XBI (bottom)

Purple vertical bar is start of 117th Congress

Why do U.S. Treasury bond interest rates inversely affect smid-cap biopharma stocks?

• With no revenue for years, for long-term investors, biopharma stocks compete with safe investments like bonds

○When interest rates go up, investments in bonds look more attractive compared to biopharma stocks

• Biopharma valuations/price targets of institutional investors go down when interest rates rise

○Higher yields on bonds = higher discount rates in valuation models

○Higher discount rates in model = lower present value/price targets

Thus, regardless of other factors, it’s possible/likely(?) that biopharma stock prices continue to inversely follow interest rates.

When will interest rates stop increasing, or even start to decrease,?

Next Fed Reserve rate decision?

This Wednesday (11/1/23) 🔥

• Market betting Fed will take another pause on hikes

• May raise again in December

○Depends on economic data

Thus, likely no rate decrease in sight in coming months 😔☹️

But maybe further into 2024, if the economy softens.

How about the second factor that probably has contributed to biopharma’s 3-year downturn?

2. Is there a more favorable U.S. Congress for drug pricing coming in 2025?

• 117th U.S. Congress session started Jan ‘2021 (at biotech peak) 

○Biotech stocks have been heading down since then (See FIGs. 1A and 1B) 📸

• Will election news in coming year suggest more favorable congress for drug pricing? 🤔

○Will Republicans &/or less liberal democrats lead in 2024 polls?

■Both are generally seen as more pharma favorable

■Will Congress pass more drug price reform legislation in 2024? 🤕

Or will other factors affecting biopharma values bring XBI back?

3. Highly active biopharma M&A

a. It’s been a very active 2023 & that has not turned XBI around

b. At some point does this finally excite the Market?

4. High-profile clinical breakthroughs

a. Lots of positive news in 2022-2023 has not helped

b. At some point are there clinical breakthroughs that turn the market?

5. Current biopharma valuations (over or underpriced)

a. XBI is near multi-year lows. How much lower can XBI go? 

i. Nowhere to go but up from here?

ii. Upside opportunity seems to far outweigh downside risk at these levels

But if you're like us, you don't want to lose more money waiting for the biopharma stock macro to turn around 😃

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Footnote 1:

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