By David Wainer
The U.S. biotech sector had already been through a brutal few years before the latest market crash. Robert F. Kennedy Jr. shake-up of the nation's health agencies and persistently high interest rates are prompting it to sink even faster than the broader market, despite so far avoiding the worst of the tariff fallout.
More investors are even wondering if the whole model -- risky science, costly funding, political uncertainty and long waits for payoffs -- is simply broken. For many of the nearly 200 companies trading below their cash value, it probably is. That illustrates the pitfalls of passively investing in an index for this sector.
Despite that bleak backdrop, there are still some opportunities for patient investors. After all, the U.S. is still the top spender on drugs by far. And that isn't something RFK Jr. or President Trump is likely to change.
That isn't to play down the overall risk. Even before RFK Jr.'s appointment, biotech was already reeling. Wave after wave of bankruptcies, shelved drug programs and layoffs had hollowed out the sector. Dozens of companies that went public during the pandemic-era boom have been locked out of capital markets. Over the past five years, the SPDR S&P Biotech ETF $(XBI)$, which tracks small- and midcap biotech stocks, has lost 14%, while the S&P 500 has gained 89%.
Just as markets began to hope for relief from falling interest rates, RFK Jr. delivered a fresh shock. His firing late last month of Dr. Peter Marks, the Food and Drug Administration official overseeing vaccines and biologics, along with mass layoffs at the Department of Health and Human Services, has investors and biotech executives worried drugs could now face arbitrary delays or politicized decision-making. For instance, one Massachusetts-based biotech had its FDA dispute-resolution process suspended after staff warned there might not be enough senior officials left to review it.
There are also concerns about long-term funding. The Trump administration's budget cuts at the National Institutes of Health are clouding the sector's innovation pipeline, while China's growing biotech industry is siphoning off deals.
Even without direct tariffs, Trump's threat of "sectoral" levies on imported pharmaceuticals is chilling investment. Deal flow, too, has dried up. Eli Lilly Chief Executive David Ricks recently warned that if drugmakers can't raise prices to offset tariffs, they will be forced to scale back research and development.
Yet there are countervailing forces at play. There is, for example, a push to rescue U.S. biotech before China, which heavily subsidizes its industry, emerges as the clear winner. On Tuesday, a bipartisan congressional commission called for $15 billion in funding to jump-start biotech research and manufacturing over the next five years.
"We lost our leadership in semiconductors, and we are close to losing that position in biotech if we don't act now," said Sen. Todd Young (R., Ind.), who chaired the commission. "We can either make targeted investments now, or we can wait and pay a very heavy price in terms of economic and national security."
Conditions at the FDA might also not be as bad as the market fears. Despite RFK Jr.'s purge, the agency is still approving drugs at a normal pace for now, points out John Crowley, CEO of the Biotechnology Innovation Organization, the industry's main trade group. Industry leaders are closely watching whether new Commissioner Marty Makary, a respected Johns Hopkins surgeon, will install strong scientific leadership to replace officials being ousted by RFK Jr.
And Marks's interim replacement, Scott Steele, has also been well-received by the industry. "We believe he will be seen as a science-forward hire," Mizuho strategist Jared Holz wrote. Crowley even suggested that a revamped FDA could end up easing drug approvals.
Large-cap names like Gilead and Vertex are one obvious place to hide out from the storm. These companies have outperformed the broader market this year, thanks to strong growth and U.S.-centric operations that shield them from tariff shocks.
And the biotech washout is also creating attractive discounts in smaller companies still poised for growth. Take CG Oncology, focused on bladder cancer, and Cytokinetics, developing treatments for heart disease. Both are down sharply this year despite potential FDA approval for new treatments that would create opportunities in large markets.
Or consider Alnylam Pharmaceuticals and BridgeBio Pharma, both of which recently won regulatory approval for therapies to rival Pfizer's blockbuster heart drug for ATTR cardiomyopathy. While these companies have held up better than the industry, in a healthier market their stocks would be up much more.
Biotech, as an industry, is going through a brutal shake out. But individually, a select crop of more mature companies will weather the storm.
Write to David Wainer at david.wainer@wsj.com
(END) Dow Jones Newswires
April 11, 2025 05:30 ET (09:30 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
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