10 Reasons Why Biotech Could Be the Hottest Sector in 2022

Biotech was one of the worst-performing sectors last year, but it might be the top-performing sector in 2022. Here are 10 reasons why.

1. Big pharma is flush with cash.

Not only do large pharma companies like Pfizer, Merck, and Roche have a combined trillion dollars in market cap available to issue shares, they’re flush with money from selling vaccines, treatments, and other Covid-19 related products.

Big pharma is sitting on a dragon’s hoard of cash. They could buy up any small or micro-cap company they wanted. Think about your own personal finances. Imagine the mindset of walking around an electronics store when you’re broke. Everything seems expensive. It would be foolish to upgrade even your toaster.

Now imagine it’s Christmas and someone just gave you a million dollars in tax-free cash. How’s that 65-inch 8K TV looking now? Like pocket change, I bet.

Big pharma could easily go on a biotech shopping spree. This alone could lift the entire sector. If your company is trading near cash with a decent-looking pipeline, you could be in line for 2x-3x payout this year.

Merger Monday, coming soon to a theater near you.

2. Many small cap/micro caps are near 52-week-lows

This ties into the first point, but it also stands alone. Not only are your cheap biotech stocks more prone to buyouts, they’re also prone to reverting to the mean.

Stocks never stay undervalued forever. Eventually they become too disconnected from reality and they snap back to where they’re supposed to. In this case, it could be the entire sector.

If every other sector has reached its peak, the only respectable gains left to found will be in biotech. Hedge funds need gains every year to keep attracting clients. Eventually they will have to pivot to biotech. Otherwise they just look like a boring ETF.

3. Most other sectors are near 52-week-highs

Somehow the broader market has thus far dodged a March 2020 collapse. Omicron continues to rage and this doesn’t make a lot of sense. Systems are collapsing nationwide, but $SPY keeps marching on.

We’ve got airline cancellations, hospitals running out of ambulances, restaurants and retail closing due to staffing shortages, etc. And it will only get worse.

Buying into sectors or companies that could be affected by Omicron (or a worse variant) seems foolish at this point. Especially when they’re already trading at record highs. Eventually this will correct, and these stocks might drop significantly.

But where’s biotech going to go? It’s already in the garbage dump. Many small caps are trading near cash value. They’ve got enough funding to last for years. It would be tough for biotech to drop any lower without triggering a tidal wave of M&A.

4. Covid-19 is creating new health problems

Are you familiar with long Covid? It’s affecting millions of people around the planet. People are suffering from months (going into years) of fatigue, memory loss, joint pain, chest pain, and more. Doctors estimate that between 20-25% of people who get Covid-19 will experience long Covid. And since the US is currently tracking near a million cases a day, this is significant.

While we should definitely be focused on preventing new infections, at some point biotech will need to pivot to treating long Covid patients.

Other health problems are also arising due to postponed surgeries and doctor visits. Cancer is very treatable if caught early, but it’s very difficult to treat if you catch it late. Some doctors are expecting a tsunami of cancer cases in the next few years just because of Covid. So, if your small biotech company has an oncology pipeline, they could be set up for serious gains while at the same time helping millions of people

5. More catalysts in 2022 than 2021

In 2021 we were still figuring out Covid. Some people still weren’t masking, others wore bandanas, or near-worthless single-layer cloth masks. We didn’t have enough air purifiers installed. And the big one, we didn’t even have vaccines at the start of 2021.

Last year was the big roll out of preventative measures. 2022 is hopefully the year we can start to benefit from that.

2021 saw a lot of trials dates getting pushed back. Some trials even had a hard time recruiting. Many pre-clinical companies also went public in 2021. Some of them have catalysts in 2022.

All of this leads to more catalysts in 2022 than there were in 2021. More catalysts are always better because some of these will pan out spectacularly, which will lead to excitement in the sector.

One of the most important non-biotech catalysts in 2022 is the American midterm elections. Republicans are likely to do well, which is good news for healthcare and the biotech sector. (Less pricing reforms.)

6. Less biotech IPOs in 2022

2021 saw more than 100 small biotech companies go public. Many of these were pre-clinical, which means they are years from producing revenue. Wall Street has an easy time shorting and destroying the market cap of companies like that. In fact, more than 80% of all the biotechs that went public in 2021 are underwater.

Given how poorly these companies performed, we’re likely to see less IPOs in 2022. This is great. If all the biotechs have been massacred, and there are less new ones to beat up, then the only direction left is up. It could take some time, but it’s impossible that companies with pipelines and cash continue to trade at near cash. This assumes that all of them will fail and/or need additional funding, and that’s just not the case.

7. Drug pricing reforms not looking that bad

Joe Biden appears to be the classic Democrat. He promised a lot, had good intentions, but then was dragged into the quagmire and had to make concessions when he wanted his bills passed.

Drug pricing seems to be a victim Washington bureaucracy. If anything substantial happens, it’s likely to be in the prescription drug area. People love headlines that affect them or their loved ones. Things like a cost reduction for insulin, or EpiPens, are likely to see more play than a cost-reduction for CAR-T cancer treatments for tumors nobody has ever heard of.

8. Omicron and future variant panic

Despite Covid-19 doing trillions of dollars in economic damage every year, very few companies (relatively speaking) have focused their efforts on additional treatments or vaccines.

There was a misguided belief that Pfizer and Moderna would put an end to the pandemic, and now everyone is paying the price. Since it is human nature to lock the barn door after the horse has been stolen, I suspect that once we’re over the Omicron hump, governments might actually start preparing for the next variant.

There could be significant funding on the table for any company working on variant-proof Covid-19 vaccines or treatments. This should have already happened of course, but better late than never.

9. Many small cap bios don’t need money

If you look at their balance sheets, many small or micro-cap biotech companies are doing quite well. Matinas BioPharma, for example, has enough cash to fuel operations until 2024. That’s more than enough time for their catalysts to play out, which, if positive, can drastically increase the share price, making it a breeze to raise cash.

Some biotech companies that were destroyed in 2021 might start generating revenue in the next year. Yes, it can take a while to ramp up sales. Especially during a pandemic. But some companies will succeed and their revenue will eclipse their expenses before they run out of cash.

Less capital raises means less imploding share prices.

10. Institutional ownership is low.

Did your company release good data in 2021? Did the share price and volume spike, but then the price came crashing down again?

You’re not alone. This happened to a lot of companies. On Twitter, Brad Loncar suggested that institutions were using good data drops as liquidity events. As in, “Oh my god, the price is spiking here’s our opportunity to get out of this crappy sector.”

This can be confirmed by looking at institutional investment on sites like Fintel or WhaleWisdom. 13-Fs are issued after the end of each quarter. Institutions must report their holdings. And these holdings have been dropping.

Across the board, institutional investment in small-cap and micro-cap biotech is low. Even if the data was good, the sector is still trash, and institutions know they can buy back in for cheap later.

Just look at Matinas Biopharma. They released fantastic data for their oral amphotericin B formulation. Over the next few weeks, the stock went from $0.82 to $1.51. Then it started to drop. When the 13Fs came out, it was revealed that their largest shareholder (Boxer Capital) had liquidated their position. This seemed foolish given the quality of the data, but the stock price has now settled near $1. They could easily buy back in for cheaper than they sold.

You can see this happening across a lot of smaller biotech stocks.

1.  Company releases great data.

2. Hype pushes the stock price higher and higher.

3. Institutions unload their shares on retail.

4. Price collapses because institutions aren’t buying, and it’s months or years before the next catalyst.

5. Retail gets bored and sells.

6. Institutions accumulate again.

Sound familiar?

Retail can move the needle, but it’s whales that make it stick. Until the institutions come back to biotech, valuations will remain depressed. Hopefully this is the year that biotech makes a roaring comeback. All signs are pointing to maybe.

Good luck with your investing and don’t forget to follow us on Twitter.