The Downturn For Big Pharma
The bullish turn for biotech since June has come in lockstep with a downturn for Big Pharma stocks. Just three months ago, the pharmaceuticals group ranked No. 34 out of 197. It has now tumbled 100 spots, ranking No. 134.
Earlier this year, rising interest rates and inflation worries sent investors
scrambling for less risky stocks. In the world of medicine, Big Pharma fits that bill. Pharmaceutical companies sell widely used products like cholesterol and cancer drugs. Biotech companies, on the other hand, are working on cutting-edge treatments where losses outnumber game-winning touchdowns. Then, investors “cared a lot more about businesses that have predictable cash flows today, as opposed to the businesses that have the promise of really big predictable cash flows in the future,” Swalla said.
“I think biotech and technology stocks suffered the same fate from an institutional-investor standpoint.” But now, experts say the paradigm is shifting from a “risk off” environment favoring companies with stable, predictable cash flows to more growth-oriented plays. And when it comes to growth, biotech tends to be among the most eye-catching segments. Lee Brown, sector lead for health care at research firm Third Bridge, says biotech stocks could actually offer investors a safe haven amid economic uncertainty. “If you’re worried about the economic climate for next year, then being in more idiosyncratic growth sectors is right out of the portfolio manager playbook,” he told IBD. Eric Schiffer, who chairs private equity firm The Patriarch Organization, has a more measured view. He says biotech remains tied to macroeconomic woes, but these stocks have been more beat-up than others and could offer investors a low point for entry. “What we do know is there’s incredible discoveries ahead that will be worth millions of dollars,” he said. “We’re in a cycle. This is a cycle that will see a bull period ahead. We just don’t know when. If investors have a long enough ride, they can do fine. They’re getting in at great valuations.”
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