While the S&P 500 is up nearly 19% heading into the final quarter of the year, biotech stocks are badly lagging the market, punishing the performance of many ETFs and other funds holding shares of companies such as Biogen (BIIB), Regeneron Pharmaceuticals Inc. (REGN), BioMarin Pharmaceutical Inc. (BMRN), Gilead Sciences Inc. (GILD), Vertex Pharmaceuticals Inc. (VRTX), and Alexion Pharmaceuticals Inc. (ALXN). These stocks have plunged over the last year.
The increasingly bearish sentiment is reflected in six consecutive weeks of outflows from biotech funds, amounting to about $2.1 billion, and marking the longest stretch of continuous outflows in nearly two years, as outlined by Barron’s.
Weakness in the biotech sector has caused a long list of ETFs to fall sharply from their highs in the last few months, including the giant iShares Nasdaq Biotechnology ETF (IBB), SPDR S&P Biotech ETF (XBI), and Invesco Dynamic Biotechnology & Genome ETF (PBE), just to name a few.
“The bleeding continues,” wrote Piper Jaffray analyst Christopher Raymond in a recent note. In 2019, healthcare and biotechnology funds have experienced more than $11 billion in net outflows, compared to just $430 million over the same period last year, according to Lipper data from Refinitiv, as cited by another Barron’s report.
“As we see it, this is a key dynamic to monitor as periods of net inflows historically correspond with biotech outperformance while periods of net outflows correspond with sector underperformance,” wrote Raymond.
Investors are shunning the group for a variety of reasons. As patents near their expiration, it’s uncertain how the industry’s leaders will sustain their growth without the scientific breakthroughs that brought them to the top, as noted by Barron’s. Meanwhile, drug price regulation remains an overhang, and disappointing M&A activity has reduced optimism.
To be sure, some argue that investors can position themselves for a biotech upturn by investing in pure play ETFs and other funds, which are much less risky than owning individual stocks. “There is so much innovation going on right now in health care, and especially in biotech and drug development—things that we once thought were science fiction,” says Ziad Bakri, who manages the T. Row Price Health Sciences (PRHSX) fund.