Biotech companies developing treatments or vaccines for the novel coronavirus have seen their stocks soar in recent weeks. Biotech stocks as a whole, however, haven't shared that good fortune. But they have fared better than the general market as the coronavirus outbreak expanded from Asia to North America, turning into a worldwide crisis. The iShares Nasdaq Biotechnology Index ETF lost 15.6%, compared to a 26.7% decline lost by the S&P 500 index so far this year.
It's too early to say how long the current health and market crisis will last, but it isn't too early to start adding biotech stocks to your portfolio right now. Here's why.
1. Shares have declined -- but not by too much
Biotech companies have been generally resilient during this uncertain time, considering the depth of declines across the rest of the market. It's great to bargain hunt, invest in stocks that have suffered, and bet on a rebound. For instance, biotech giant Amgen (NASDAQ:AMGN) is down 18% year to date, and the shares are trading near a six-month low. In such cases, and there are plenty these days, you are gaining access to a strong pipeline and annual product revenue at a decent price. But it also is important to reinforce your portfolio with shares that have proven their ability to hold up under major pressure. Big player Vertex Pharmaceuticals (NASDAQ:VRTX) has done this, posting losses of about 0.5% so far this year.
2. Limited effects
The coronavirus outbreak, resulting in more than 392,000 casesworldwide so far, is wreaking havoc on certain sectors like retail. With the temporary shutdown of stores, retailers can expect a drop in sales during the current quarter -- and maybe even beyond as the crisis weighs on the economy and shoppers' wallets.
Biotech, however, is unlikely to face a similar fate. According to Barron's, Bank of America analyst Geoff Meacham, in a note earlier this month predicted the effects on biopharmaceutical companies would be "limited." He said, biotech companies' products are a necessity, so any slowdown due to manufacturing interruptions should be short-term.
Last week, Biogen (NASDAQ:BIIB) said in a statement that it doesn't expect interruptions in manufacturing, but couldn't exclude the possibility depending on how the crisis develops.
3. Interest in the industry
Never before have so many eyes been on the biotech industry. The race is on for a treatment or vaccine for COVID-19, the illness caused by the new coronavirus, and biotech companies are at the forefront.
Remdesivir, an experimental treatment by Gilead Sciences (NASDAQ:GILD), is being given to patients in Washington, one of the disease epicenters in the U.S. Regeneron Pharmaceuticals (NASDAQ:REGN) is working on a coronavirus treatment with the U.S. Department of Health and Human Services, while the National Institutes of Health is conducting a clinical trial with Moderna's (NASDAQ:MRNA) investigational vaccine. A spotlight on these and other players could lead to more investment in biotech companies with marketed products as well as clinical stage companies. Takeover activity may be in the future, too, as larger companies seek to add breakthrough technology and products to their aging portfolios.
4. FDA approvals
Last year, the FDA approved 48 novel drugs, well above the 10-year average of about 38. The number of approvals has more than doubled since 2010, and with the exception of a couple of dips, the approval numbers have been on an upward trajectory for most of the decade. Expecting the trend to continue is a reasonable bet. The FDA's "friendly" stance bodes well for biotech companies, as their pipelines and potential to bring products to market are critical to their ability to grow revenue and, eventually, earnings.
As always, investors should evaluate biotech companies on a case-by-case basis. I recently wrote about how some biotech stocks that have climbed on optimism about their coronavirus work may have trouble sustaining gains beyond the outbreak. Still, there are plenty of opportunities right now to buy biotech stocks -- and benefit well into the future.