Brad Loncar, CEO of Loncar Investments

If you want to see how far biotech stocks have fallen on Wall Street over the past year, check out the numbers from the largest electronic transfer funds or ETFs.

The largest ETF—the iShares Nasdaq Biotechnology ETF (IBB)—has fallen about 23% year over year, to $131.80 on Thursday from $170.26 on February 10, just two days removed from the 2021 high of $172.60.

Investors fared worse on the SPDR S&P Biotech ETF (XBI), which plunged 44%, to $94.36 from $168.01, but experienced smaller losses in two other ETFs: The First Trust NYSE Arca Biotech ETF (FBT) dropped 18%, to $150.78 from $184.16, while Invesco Dynamic Pharmaceuticals ETF (PJP) showed the smallest decline, declining 6% year-over-year to $76.93 from $81.68.

Half of XBI’s plunge (21%) has occurred since the start of the year, Jefferies analyst Michael J. Yee noted in a February 8 research note.

“Investors may be worried about whether biotech is still an investable sector. We’d argue that SMids [small- and mid-capitalization stocks] have felt most of the impact, and importantly that large caps have relatively outperformed YTD and may continue to do so given the likely ongoing volatility for H1/22,” Yee wrote.

It’s hard to tell how soon the XBI will begin to bounce back, Baird Senior Research Analyst Brian P. Skorney, CFA, and five colleagues recently commented.

“Our call for XBI recovery in 2022 has looked increasingly bad, as valuations have become even more anemic,” Skorney and colleagues wrote January 28. “There continues to be a clear absence of a bid, and most of our conversations this week have been around what turns things around, but it’s hard to know when we will find a bottom.”

For many, this dramatic decline caught observers off guard. For example, in October 2020, the Nobel Prize in Chemistry validated the discovery of CRISPR genome editing and helped fuel a surge in the valuation of CRISPR biotech stocks.

But those gains have long since evaporated. Among three prominent CRISPR-based drug developers, CRISPR Therapeutics shares have cratered 79% year-to-date, to $16.13 on Friday. During the same period, shares of Editas Medicine have dropped 39%, to $16.13, while Intellia Therapeutics shares have fallen 23%, to $91.41.

As biotech industry expert Brad Loncar has observed: “Biotech is a rollercoaster. It is not uncommon for years like this to happen,” noting that two of the previous five years also saw stock declines for biopharmas.

“It always feels difficult when you are going through it. Past performance is no guarantee of future results, and nobody can predict what will happen in the future.”

Here are five key factors that underpin the recent declines seen in biopharma stocks:

1. FDA approval process

From the controversial approval of Biogen’s Alzheimer’s disease drug Aduhelm (aducanumab-avwa) last June to some unexpected rejections reflected in complete response letters (CRLs) that sent individual companies’ stocks plunging, investors are less sure about what biopharmas need to show the FDA in order to gain approvals than at any time since the 2007-12 period.

In 2007, frustration over Vioxx—the Merck & Co. painkiller pulled from the market following its approval after patient claims linking it to heart attacks and strokes—prompted a Congress under split majorities (Democratic House, Republican Senate) to pass the Food and Drug Administration Amendments Act (FDAAA). Industry soon complained that the FDAAA slowed down reviews of new treatments to a near standstill, posing a different sort of safety risk to patients. Five years later, under Republican House and Senate majorities, Congress swung the pendulum back toward biopharmas through the FDA Safety and Innovation Act of 2012 (FDASIA).

Since then, the number of new drugs approved each year by the FDA has mostly grown, reaching a peak of 59 in 2018, and growing last year to 53 from 50 in pandemic-skewed 2020—compared with 35 new drugs approved in 2012 and 27 in 2013.

But in recent weeks, the agency has surprised investors by issuing “complete response letter” (CRL) rejections rather than authorizations for new drugs that include Pfizer/OPKO Health’s somatrogon, a once-weekly pediatric growth hormone deficiency treatment; Merck’s gefapixant, indicated for adults with refractory chronic cough or unexplained chronic cough; and Ardelyx’s tenapanor for chronic kidney disease.

Ardelyx responded in December by filing a Formal Dispute Resolution Request seeking to appeal its CRL, only to receive an Appeal Denied Letter on February 4, the company acknowledged in a regulatory filing five days later.

2. FTC M&A landscape

Also stoking uncertainty about biotech stocks among investors is the unsettled landscape for industry mergers and acquisitions (M&A), especially those requiring clearance from the U.S. Federal Trade Commission (FTC). The FTC earlier this month signed off on Sartorius Stedim Biotech acquiring acquire the chromatography equipment business of Novasep Process SAS for an undisclosed price, a deal completed February 8.

However, the regulatory outlook is still uncertain for one of the largest pending acquisitions in the industry, Illumina’s $8 billion purchase of Grail. For nearly a year, the FTC has been challenging the deal, alleging that it would lessen innovation in the U.S. market for multi-cancer early detection blood tests like those marketed by Grail. The FTC cannot conclude its case against Illumina and Grail pending resolution of a months-long legal dispute arising from Illumina issuing a subpoena to Caris Life Sciences, seeking information that Caris has objected to providing, alleging that they constituted “core trade secrets.”

The FTC is now led by Lina Khan, who has criticized mergers involving tech giants like Amazon and Facebook. Investors are waiting to see how the Khan-led FTC handles another large pending merger in biopharma, Pfizer’s planned approximately $6.7 billion purchase of Arena Pharmaceuticals, announced in December.

2021 saw the second-lowest total value of biopharma M&A since 2014, a combined $108 billion—down 16% from $128 billion in pandemic-wracked 2020, and a 59% drop from the record-high $261 billion in 2019. Yet the number of M&A deals rose to 90 in 2021 from 66 in 2020, four more than in 2019. Biopharmas are increasingly embracing smaller “bolt-on” deals (accounting for less than 25% of a buyer’s market capitalization), Subin Baral, EY Global Life Sciences Deals Leader and a co-author of the report, told GEN Edge recently.

3. Prescription drug pricing debate

The longtime debate over drug prices flared anew over the past year, as President Joe Biden’s Administration signaled renewed, if occasional, interest in reining in drug costs.

President Joe Biden

In December, President Biden proposed imposing a “steep” excise tax on drug developers that refuse to negotiate prices with Medicare, as well as setting a $2,000 annual cap on out-of-pocket costs for people 65 or older, and setting penalties on companies that raise Medicare Part B and D drug prices above inflation.

Biden also proposed that Medicare begin in 2023 to negotiate the prices on 10 of the costliest drugs that have only one supplier, in diseases that include cancer. New prices would take effect in 2025. The number of drugs subject to negotiations would grow each year, reaching 20 in 2028.

Biden’s price-cutting proposals, unsurprisingly opposed by industry, face an uncertain fate in Congress given narrow Democratic majorities in the House of Representatives and Senate—as well as November’s Congressional elections. The most recent monthly survey by the Center for American Political Studies at Harvard and The Harris Poll showed a 53–47% majority voting for a Republican vs. a Democrat.

Last July, Biden ended by executive order a proposed rule issued by predecessor Donald Trump on lowering drug prices by exercising “March-In-Rights,” such as seizing intellectual property rights and allowing other companies to produce drugs at lower cost, where the federal government concludes it contributed to creating the underlying IP via grants or research.

“They provide the government with important leverage that it can use to moderate pharmaceutical companies’ behavior,” Peter Arno of the University of Massachusetts, Amherst; Dana Neacsu of Columbia Law School; and Kathryn Ardizzone of the nonprofit Knowledge Ecology International, have asserted in Health Affairs.

However, Megan Van Etten, senior director of public affairs at industry group Pharmaceutical Research and Manufacturers of America (PhRMA), has contended: “This policy could have a grave impact on the pipeline of new treatments and cures.”

4. Inflation and underwhelming data

Questions about the durability of the current inflation wave appeared to have been answered on Thursday, when the U.S. Bureau of Labor Statistics reported a 12-month inflation rate of 7.5% for January, up from 7% in December 2021. Because most biotech companies generate no revenue, their valuation comes from the present-day value of revenue (risk adjusted) that won’t be generated until well into the future.

“If the present value of a future dollar becomes worth less today due to inflation, it will be these companies with far out revenue that are most affected in valuation today,” Brad Loncar, CEO of Loncar Investments, wrote in a recent commentary. “Unfortunately, there isn’t anything an investor can really do about inflation, but it is something to be aware of.”

“My philosophy is to mostly ignore it and to focus virtually entirely on a company’s scientific merits, because science is make or break and something like inflation will at best affect the periphery,” Loncar advised.

Loncar told GEN Edge investors assessing scientific merits have seen in many instances underwhelming clinical data, particularly with gene therapies. Sarepta shares plunged 30% in January, sinking to $63.15 on January 19 (since rebounding to $78.70 on Thursday) after the company’s January 10 announcement of results from Part 2 of the Phase II SRP-9001-102 trial (NCT03769116) evaluating SRP-9001 in Duchenne muscular dystrophy.

Twenty patients treated with SRP-9001 showed a mean 1.3-point improvement in North Star Ambulatory Assessment at week 48, a statistically significantly better outcome than Sarepta’s 103-patient natural history control arm. “While the data are positive, we think the improvement from baseline was below investors’ bar for clear success (>2 points),” Brian P. Skorney, CFA, Senior Research Analyst with Baird, wrote in a note headlined: “Update is marginal when investors were looking to be wowed.”

5. Volatile industry

The slide in biotech stock prices coming after years of sharp gains illustrates the essentially volatile nature of the industry’s public companies.

Stock prices for many early-stage companies rocketed up unjustifiably, only to crash to earth now, Stelios Papadopoulos, chairman of Biogen and a former investment banker, told Bloomberg on Monday: “The problem is not too many science experiments. The problem is too many highly priced science experiments with a very significant amount of risk associated with them.

For most of 2021, the proverbial rollercoaster was climbing, with private and public financings seeing record activity. Biopharmas racked up a record-high $37.8 billion in venture capital in 1,198 deals last year, up 41% from $26.8 billion in 1,042 deals, according to PitchBook and the National Venture Capital Association.

Last year, 77 biotech companies priced shares in traditional IPOs during 2021, compared with 88 in 2020, according to IPOScoop.com. [Bloomberg counted 121 companies in 2021, vs. 95 in 2020] That does not include additional capital for early- and growth-stage companies generated through special purpose acquisition companies (SPACs). There were 17 biotech SPACs in 2021, including the $17.5 billion SPAC merger completed in September by Ginkgo Bioworks, and the $500 million SPAC merger of Sema4.

As of last week, only six biopharmas had gone public so far in 2022, while five SPAC mergers were in the works.

Over the past year, the U.S. Securities and Exchange Commission (SEC) dampened investor enthusiasm for SPACs, issuing a guidance advising SPACs to account for equity warrants as debt, and later advising SPACs to treat “redeemable” shares as temporary or “mezzanine” equity. That’s one reason why biotech companies looking to go public in 2022 are likelier to do so via traditional IPOs. The other reason: Their share prices have risen faster than SPAC IPO companies.

“Challenging year aside, I have never been more excited about advances in science that are happening today,” Loncar added. “I cannot wait to see where science takes us next year.”