Small Cap Biotechs Sagging But More Deals Are Likely To Perk Up The Market

Small Cap Biotechs Sagging 

  • Listless seasonal market action through October.
  • More licensing and M&A needed in Q4.
  • Large cap Biopharma could be hit by drug pricing legislation.

Despite record highs in the Nasdaq recently at the 15,000 level the biotech market seems sluggish. Speculation has ebbed. As if we need a green screen every day. But as people get back to work and Q3 earnings come out in October the direction of the market should get clarified. We need positive business news to drive markets against a backdrop of global malaise of delta variant spikes, a potential GDP slowdown, and concerns about inflation. Moreover the so-called “reopening rally” is fading with cyclical stocks down over the past month.

Still, we have few winners lately and small M&A deals. Kadmon Holdings  (KDMN) was up over 70% today to $9.15 as the French drugmaker Sanofi (SNF) bought the Company for $1.9B to bolster its transplant portfolio. Kadmon is focused in graft-versus-host disease and their lead product Resurock was recently approved by the FDA. Kadmon stock started moving from the $4 level in early August.

Small Cap Biotechs Sag But Provide Innovation Over the Long Term

Momentum for small caps peaked in February 2021. Here are three ETFs that correlate with small cap performance.

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All of our small cap focus picks have been weak lately and are up today: CRSP, CYRX, and VCYT. All are doing well since we bought them in May. Veracyte (VCYT) is up 45% over 3 months. We have a new position in Quidel (QDEL) that is up over 5% to $140 on expanded COVID testing.

Biotech innovation is key to future market gains and the genomics product potential has just begun as shown with mRNA vaccines.

Gene therapy stocks are all up today as clinical data continues to roll out. Many are down 40% off their highs but are all excellent trading vehicles.

Diversification is Key to Portfolio Management

Sector performance outside healthcare is volatile due to a slower growth forecast and the delta variant. Energy (XLE) and materials (XLB) are lagging. Expectations are higher for Financials (XLF) and Consumer Staples (XLP) due to their relatively defensive holdings.

Review our previous posts focused on biotech and healthcare. Two ETFs were key to our performance in 2021: IBB up 15.8% and XLV up 19.6% YTD. United Health (UNH) is up 19.4% YTD but relatively flat since early May. Large cap biopharma has carried us in 2021 because of modest growth plus dividends. But in early am trading large caps are weak presumably to concerns yet again about drug pricing legislation. If biotechs are to regain favor we need to see small cap action to pick up and this requires more dealmaking.

Disclosure: None.

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