High-flying sector in 2020 has fallen to earth even as pharma giants see historic triple-digit gains
After blockbuster gains that made biotech a rare bright spot among hedge funds in recent years, the sector has fallen far and hard from the heights it saw during the concerted global effort to develop COVID-19 vaccines in 2020.
The descent has led to a rough landing for some hedge funds, according to the Wall Street Journal. Those include Perceptive Advisors, a US$9-billion biotech hedge fund that lost roughly 30% this year through November in its main fund; an US$18-billion healthcare fund managed by OrbiMed Partners, which has lost more than 40%; and a US$1.4-billion fund run by Logos Capital, which has shed more than 25%.
“It’s been a very challenging year,” Bihua Chen, founder of Cormorant Asset Management, told the Journal. The fund, which focuses on smaller biotech companies, extended its double-digit losses in 2021 with a 10% decline in November.
The collapse in biotech has been surprising to many investors focused on giants such as Moderna and Biotech, which have gone up 194% and 322% in 2021 following their historic success in developing COVID-19 vaccines.
Among the forces buffeting the broader sector are concerns that the U.S. Congress will move to cap drug prices, as well as a glut of early-stage biotech shares generated by a booming IPO market; this year has brought 91 biotech IPOs in the U.S., according to Dealogic data, compared with an average of roughly 46 annually in the past five. That has prompted a selloff among generalist investors, who generally have little experience holding volatile biotech shares.
Some funds have also been burned by wrong-way bets against the S&P 500, which they had put in place as a hedge against their biotech holdings. Adding to that pain was the fact that acquisition activity, which has traditionally brought meaningful returns in the sector, was less-robust than expected this year.
Gene-therapy efforts that biotech funds typically put money behind have also suffered setbacks from safety scares, including deaths of several study subjects.
“Biotech saw money rush into the sector when the pandemic hit and this year we have experienced the hangover effect,” Brad Loncar at Loncar Investments told the Journal. The firm launched two biotech ETFs, one of which has lost 15% this year while the other gained 2%.
