The Case For Biotech

My argument for why certain companies in the beleagued sector could see strong gains in 2025 - if they meet a defined set of criteria.

Investing in biotech as a sector has been an exercise in frustration since the end of January 2021. The XBI 0.00%↑ index has lost almost 50% of its value since then and considering that the index was recently reweighted to focus on larger, less volatile names it’s safe to say the underlying damage in small-cap stocks has been far greater than what the index reflects.

These are your gains on biotech. Any questions?

Even more frustrating to biotech investors is biotech used to be THE sector for risk-on rotation and speculative risk taking. The last four years has seen unprecented euphoria in other areas: Bitcoin. Ethereum. NFTs. Altcoins. GME/AMC. Graphics cards. Quantum computing. A few more I’m forgetting. Whatever! But not biotech.

While biotech investors have shouldered a large amount of risk, the sector has done a poor job of delivering gamechanging medicines that capture the public’s admiration and the 2019-2021 bull market that arose from COVID therapeutics/vaccines has become a distant memory. Institutional investors deserve blame too as specialist funds have supported questionable companies that operated their pipeline more as science projects (and job creation programs) rather than lean startups laser-focused on bringing new transformative therapies to market. The public at large has mostly forgotten about biotech as a sector and the industry has given them no reason to remember.

While I’m not confident the entire sector has completely learned its lesson (or perhaps any lesson at all) I do feel there is a stockpickers’ market at hand as certain companies have emerged from the last four years of high interest rates with clean balance sheets, trimmed budgets, and differentiated medicines that can achieve blockbuster status.

Sure, biotech has always been a stockpickers sector to a large extent given the high failure rates endemic to drug development. But more, now than ever, I believe a sophisticated biotech investor can well exceed the XBI index and even the greater stock market as a whole by adhering to five principles.

My Five Criteria To Buy Biotech Companies That Beat The Index: