What happened
After a promising start to 2023, clinical-stage biotech stocks reversed course this week. For example, shares of the developmental-stage biotechs Altimmune (ALT 0.83%), Foghorn Therapeutics (FHTX 4.97%), and Precigen (PGEN 0.71%) all dropped by double digits during the first three and half days of trading this week, according to data provided by S&P Global Market Intelligence.
The S&P 500 index and the SPDR S&P Biotech ETF essentially treaded water from a performance standpoint over this same period. Investors, in turn, appeared to single out risky clinical-stage drug developers, such as these three companies, as top stocks to avoid this week.
So what
What's behind this sudden trend reversal? Tuesday's latest inflation reading, courtesy of the Bureau of Labor Statistics, is the likely culprit. Underscoring this point, Altimmune, Foghorn Therapeutics, and Precigen have all been relatively quiet on the press release front this month.
Why did this latest inflation reading cause investors to hit the exits on these pharma stocks? Although there are some encouraging signs that inflation is starting to cool, the Consumer Price Index still rose by a whopping 6.4% over the prior 12 months, according to this latest report. This figure is over 3 times higher than the Federal Reserve's target of 2% annual inflation.
What this means is that the Federal Reserve will probably continue to hike interest rates in an attempt to tamp down inflation for the foreseeable future. That's unwelcome news for cash-flow-negative companies like Altimmune, Foghorn Therapeutics, and Precigen.
After all, these types of companies generally rely on favorable terms to meet their short- and long-term financing requirements. As things stand now, though, debt vehicles may prove too costly for pre-revenue biotechs in the current environment -- meaning that secondary offerings might be the only realistic option for these companies to raise capital.
Now what
Are any of these development biotech stocks worth buying on this latest pullback? Altimmune sports multiple near-term catalysts in obesity and nonalcoholic steatohepatitis that could spark a sizable rally in its shares later this year. Foghorn Therapeutics, for its part, is slated to reveal early-stage data in skin and soft tissue cancers that might light a fire underneath its stock in second half of the year. And Precigen's UltraCAR-T and AdenoVerse platforms may also deliver a handful of rally-inducing catalysts at some point this year.
All that being said, these small-cap biotech stocks will likely be heavily dependent on market sentiment in the near term. Unfortunately, the market isn't in a risk-taking mood, which doesn't bode well for the prospects of these three names right now. Potential investors, therefore, probably shouldn't buy these developmental-stage biotech stocks unless they are willing to buy and hold for the long term.
