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Here's Why Clinical-Stage Biotechs Get Hit Harder During a Market Decline

By Brian Orelli, PhD and Keith Speights - Mar 21, 2021 at 1:00PM

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Short-term investors may not see the long-term potential.

Biotech investors are probably a little depressed, with valuations of the industry down since their peak in February. In this video from Motley Fool Live, recorded on March 8, Fool.com contributors Brian Orelli and Keith Speights explain why smaller development-stage companies have been hit especially hard during the downturn.

Brian Orelli: First up, let's talk about biotech's rough week and rough last couple of weeks. We had a bit of a recovery on Friday, but the tech-heavy Nasdaq was down about 2%. But the iShares Nasdaq Biotechnology ETF (IBB 0.13%), which is the market cap-weighted biotech ETF, was down 4%, and another biotech ETF called the SPDR S&P Biotech ETF (XBI -0.20%), which is equal weight, so smaller companies count more there, was down 6% last week.

Some particularly hard hit companies this week. Novavax (NVAX -7.50%) was down 24%, Vir Biotechnology (VIR -1.55%) was down 28%, Ocugen (OCGN -4.29%) was down 20%. Any thoughts as to why at clinical-stage biotechs are getting particularly hard hit?

Keith Speights: Yeah. I mean, some of them fell for a good reason, not just the stock market sell-off. For example, Vir Biotechnology stock plunged after the company announced disappointing results from a late-stage study of an antibody therapy that they're developing with GlaxoSmithKline, and this antibody therapy is targeting COVID-19. There were some concerns raised in the analysis about the potential benefit of that particular therapy. So there was a good reason why Vir stock fell especially hard.

But other companies actually had good news and still fell. For example, Ocugen, their partner, Bharat Biotech, announced 81% efficacy for its COVID-19 vaccine, Covaxin. That's pretty good results there. Ocugen and Bharat are working together to hopefully commercialize that vaccine in the U.S. if all goes well. But Ocugen stock, like you said, just still fell 20%, even with good news.

I think the main reason why the clinical-stage biotech stocks got hit especially hard is that they trade at prices that are really totally at the whim of investors. Established biotechs with products on the market generating sales, those kind of companies, investors can look at them, they can look at their business, they can see how the sales are growing for their existing products, they can look at their pipelines, and they can come up with a, I guess, more reasonable guess of their valuation. But a clinical-stage biotech stock is just a lot harder to do that with. It's all about what do you think their potential is, and when investors are in a sour mindset, which is what happened last week, these stocks are going to get hammered, and that's exactly what we saw.

Orelli: The other issue is that they're going to be based on future earnings, and then discounted for risk-adjusted discount, and so that means when the price of interest rates goes up, now you're talking about risk-free or less risk. You get more for those when the interest rates go up, and therefore, you need to account for that in the valuation, and so that drives down valuations.

Speights: Exactly. That impacts all stocks. But it especially hits the more speculative stocks, clinical-stage biotech stocks just are more speculative by nature.

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Stocks Mentioned

Novavax, Inc. Stock Quote
Novavax, Inc.
NVAX
$48.00 (-7.50%) $-3.89
SPDR Series Trust - SPDR S&P Biotech ETF Stock Quote
SPDR Series Trust - SPDR S&P Biotech ETF
XBI
$68.46 (-0.20%) $0.14
iShares Trust - iShares Nasdaq Biotechnology ETF Stock Quote
iShares Trust - iShares Nasdaq Biotechnology ETF
IBB
$113.29 (0.13%) $0.15
Vir Biotechnology, Inc. Stock Quote
Vir Biotechnology, Inc.
VIR
$22.28 (-1.55%) $0.35
Ocugen, Inc. Stock Quote
Ocugen, Inc.
OCGN
$2.01 (-4.29%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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