Three Compelling Data Points that Biotech is Back

Lou Basenese

Thursday, September 15, 2022

Don’t look now, but after seven months of a brutal sell-off, the biotech sector is showing signs of life.

It was inevitable, given that we literally can’t live without the biotech sector and the life-saving drugs it develops.

Of course, naysayers still exist.

Case in point: A recent Barron’s article insists it’s “too early to conclude that the pullback is over.”

Nonsense!

Here are three definitive signs that not only is the biotech winter over, but that we could be ramping up for a new wave of major profits.

Biotech Bullish Sign #1: The bottom is in!

Ever since hitting an all-time high in February 2021, the SPDR S&P Biotech ETF (XBI) has suffered mightily to find bottom.

Each time the index approached historical support levels, investors got hopeful… and then were quickly disappointed, as prices plummeted right through them.

With the March 2020 and December 2018 lows breached, all eyes turned to the February 2016 lows.

If the XBI fell that far, we’d be talking about a 75% pullback, which would have been the worst on record by far.

Thankfully, we were spared!

As you can see, the XBI put in a definitive bottom in early June at 62.13 and then rallied as much as 53% to 95.18, before settling in around 85.


(click image to enlarge)

Of course, the notoriously conservative sell-side analysts still aren’t buying that the bottom will stick.

Consider…

The analysts over at Cowen recently wrote, “The green shoots are welcome, but overall the mood remains reserved… Investors are unconvinced that the biotech bear market is over, and in fact many anticipate there will be another leg down should the broad market resume its selloff.”

I completely disagree!

Why? First, simply because the bottom has been sticking.

Case in point: It’s been over three months since the index plumbed those levels and hasn’t come close to testing them again. At current prices, the XBI is 37% above the June bottom.

What’s more, the index is trading above both key technical support levels of the 50-day and 200-day moving average.

Most instructive of all, though, is the fact the next two data points wouldn’t exist if another biotech rout was right around the corner…

Biotech Bullish Sign #2: Data matters again

Sales and revenue don’t drive stock prices for most biotech companies. Why? Because they typically don’t have them.

Remember, these companies spend years and years investing, researching, and testing new drugs. If they work, the drugs get bought by big pharmaceutical companies for billions of dollars who then generate the sales and profits from them.

As a result, data is what drives biotech companies. Significantly!

In fact, it’s not uncommon for compelling Phase 1 or Phase 2 data to propel biotech companies’ stocks hundreds of percent higher.

That is, most of the time.

During bear markets, unfortunately, strong data doesn’t matter.

Instead of being a buying opportunity, investors use it as a liquidity event to exit massive positions without collapsing the stock price further.

And that’s precisely what we saw for the last year or so – biotech companies reporting good to great data and their stocks trading a ton of volume, but the prices going nowhere.

But not anymore!

In recent months, good data is being rewarded again, sending shares of deserving biotechs up 100% or more in a single day.

Don’t believe me? Look no further than Akero Therapeutics, Inc. (AKRO).

On Tuesday, the company reported compelling data from a Phase 2 trial for a drug that treats NASH, a chronic liver disease that is now the leading cause of liver transplantation and cancer.

And shares surged 143%. In a single day.

Rest assured, a return to this type of trading activity doesn’t happen if another leg down is imminent.

It also means it’s high time to start buying compelling biotechs with upcoming data readouts.

Biotech Bullish Sign #3: Big Pharma buyouts are back

In previous articles, I shared research from investment bank Jefferies that showed historically, big pharma companies step up in a big way to acquire smaller companies coming out of every major biotech bear market.

And it’s happening again, right on cue.

Turns out, the second quarter was one of the busiest ones for acquisitions in recent years, with 14 sizable deals being announced.

And the buying has only continued since then, including…

  • On August 4, Amgen Inc. (AMGN) announced a $4 billion takeover of ChemoCentryx, Inc. (CCXI).
  • Also on August 4, Gilead Sciences, Inc. (GILD) announced a $405 million deal for private biotech, MiroBio.
  • On August 8, Pfizer Inc. (PFE) finalized plans to pay $5.4 billion for Global Blood Therapeutics, Inc. (GBT).
  • On September 7, Roche Holding AG (RHHBY) snatched up privately held Good Therapeutics for $250 million.

The premiums paid in each of the above deals ranged from 43% on the low end to an impressive 116% on the high end. Again, those are single-day gains.

In case you didn’t know, there’s no other segment of the market that offers such upside potential on data or deals.

Even if you don’t own the specific companies being acquired, you can still benefit from the increased activity.

How? By owning XBI, because it has interests in over 130 compelling, smaller biotech companies.

That means any buyouts at big premiums for companies that are included in the XBI ETF drives prices up for the overall ETF.

And in this week’s Trend Trader Pro “Trade of the Week” I share a speculative way to potentially multiply those potential profits. So don’t miss out!

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Ahead of the tape,
Lou Basenese
Lou Basenese

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