By Andrew Bary

Biotechnology may be the stuff that dreams are made of, but more recently, the sector has been a nightmare for investors.

Biotech is coming off one of its worst weeks in several years after the SPDR S&P Biotech exchange-traded fund fell about 7% following the resignation of a key Food and Drug Administration regulator, Peter Marks, who oversaw approval processes for vaccines and novel biotech therapies. There were also fresh budget cuts at the agency and the departure of other drug regulators. It didn't help that the Trump administration's top health official, Robert F. Kennedy Jr, is a vaccine skeptic and lukewarm on traditional medicine.

The damage has been even worse than it looked, since shares of some of the largest biotechs, such as Amgen, Vertex Pharmaceuticals, and Gilead Sciences, had rallied higher this year as investors pivoted to the defensive healthcare sector amid the tech-stock selloff. But many stocks are down 30% to 50% this year alone, while the broadest ETF, the SPDR S&P Biotech, is off 13% in 2025 and more than 50% from its 2021 peak.

Shares of small companies in formerly hot areas such as gene therapy are down by as much as 99% from their peaks.

The broad and deep selloff creates an unusual opportunity. Biotechs can generate huge returns if they get drug approvals or are bought by larger competitors. These small to midsize companies -- hundreds of them -- have rarely been cheaper, and well over 100 trade for less than the cash on their balance sheets, according to Chardan Capital Markets data. This offers a security blanket to investors, even as the industry burns through more than $50 billion annually to pursue drug approvals. It's almost as if investors are pricing in little chance for success, rather than seeing these stocks as opportunities.

"Our investor sentiment surveys are among the worst we have ever seen dating back to 2000," says TD Cowen biotech analyst Yaron Werber, who sees a bounceback in the sector later this year.

Biotech investing is dicey in any environment because only a fraction of the hundreds of public companies will develop a commercially successful product. Just one in 10 drugs that enter clinical trials ends up getting regulatory approval and fewer still are commercial successes. The current environment is particularly tough: BMO Capital Markets analyst Evan Seigerman called the recent resignation of Marks a "significant negative." He cited threats to the FDA's independence and historical focus on "scientific rigor."

The big concerns are greater FDA skepticism on drug approvals and longer approval times. The markets, however, may have overreacted to the Marks news. The new head of the FDA, Dr. Mark Makary, is generally viewed favorably on Wall Street and in the scientific community.

Even though they continue to lead the world in innovation, American companies face a growing threat from Chinese biotechs that have strong government support. In December, Merck surprised Wall Street by partnering with a little-known Chinese biotech on a weight-loss drug that uses the same GLP-1 approach as industry leaders Eli Lilly and Novo Nordisk.

This gloomy sentiment is far removed from 2021, when biotechs such as Moderna and BioNTech developed Covid vaccines that led the world out of the pandemic, and investors enthused over new technologies like gene editing that had the potential for curing genetic diseases such as hemophilia, muscular dystrophy, and sickle cell anemia. The stocks have been hammered since then, with Moderna, down more than 90% from its pandemic peak, now trading at a small premium to its cash. Genomic darlings Editas Medicine and Ginkgo Bioworks Holdings are down close to 99% from their 2021 highs, despite sizable cash cushions and real businesses.

The odds can be tough for investors since biotech stocks often amount to lottery tickets. Biotech is probably the largest sector in the stock market -- and relatively few succeed. There were over 150 initial public offerings in 2020 and 2021, TD Cowen data show. The 2020-21 IPO crop is down an average of more than 30%.

The key to biotech is finding companies with lots of cash and promising drug pipelines. Jefferies analyst Michael Yee recently analyzed over 360 publicly traded biotech companies and found they were trading at an average of just a 20% premium to the cash on their balance sheets, indicating that investors effectively were putting little value on their drug pipelines. A year ago, the group traded at twice cash levels, and the average over the past 23 years has been three to four times.

Yee attributed some of the weakness to selling by institutions in a risk-off market. "Many low-liquidity names are down big on no news, and even stocks with positive catalysts have sometimes had trouble sustaining gains," he wrote. Most of the cash-rich companies have market values of under $300 million.

Trying to spot the winning ticket isn't easy, and investors might decide they're better off letting the pros do the digging. The equal-weighted SPDR S&P Biotech, which holds 125 stocks, has more exposure to smaller names then the other big biotech ETF, iShares Biotechnology, which is weighted toward larger companies and is down 6% this year. There also are mutual funds like the Fidelity Select Biotechnology Portfolio fund or the Janus Henderson Global Life Sciences fund.

None of the funds offers significant exposure to hard-hit small- to mid-cap biotechs. Instead, Barron's spoke to analysts and investors about their favorites.

Start with Moderna, whose shares are down 38% this year, to $26 -- back where they traded before the company won approval for its Covid vaccine. It now has a market value of $9.9 billion, little more than its $9.5 billion in cash and investments at year-end 2024. CEO Stephane Bancel feels the shares are too cheap. He bought $6 million in stock at around $30 a share in March.

Moderna is burning a lot of cash, which could fall to $6 billion by the end of 2025. But the company has a promising pipeline of vaccine and cancer therapies, and could become an activist or takeover target. One target for an activist could be its $4 billion annual budget for research and development, which is larger than Vertex's, despite Moderna having a fraction of its revenue.

BioNTech, which partnered with Pfizer on the leading Covid vaccine, is also cheap. The German biotech, whose shares trade for about $92, sits on $19 billion of cash and equivalents, against a market value of $22 billion, and is using its Covid windfall to develop a group of cancer drugs. BioNTech's cash burn is more moderate than Moderna's.

Structure Therapeutics is a favorite of Agustin Mohedas, a portfolio manager in Janus Henderson's healthcare group. Structure is pursuing a potentially huge opportunity -- a diet pill using GLP-1 technology.

That's a big change from existing GLP-1 diet drugs, including Novo Nordisk's Ozempic and Lilly's Zepbound, which need to be injected. Structure's oral GLP-1 is now in clinical trials, and Mohedas thinks it could be competitive with an oral drug from Eli Lilly currently in development. An oral GLP-1 could generate huge sales, and Structure stock now trades for $16, down 71% from its 52-week high. The company is valued at $900 million, about equal to the cash on its balance sheet.

J.P. Morgan analyst Hardik Parikh sees Structure as a pure-play option on oral GLP-1s. "We estimate even a small share would result in meaningful revenue for the company of $1 billion-plus, and support substantial upside to the stock," Parikh wrote recently. He has an Overweight rating and a price target of $65, up more than 300% from its recent close.

Janus Henderson's Mohedas also sees an opportunity in Vaxcyte, which is developing a pneumonia vaccine, or PCV, for infants and older adults in a large market that Pfizer leads. The stock fell more than 50%, to $31, this past week, after mildly disappointing results from a Phase 2 clinical trial in infants, continuing a slide that started in late 2024, when shares traded as high as $115. Mohedas says the market overreacted. " Vaxcyte remains in pole position to eventually dominate the $8 billion (annual revenue) PCV market with its VAX-31 in adults and infants," he tells Barron's. The company ended 2024 with $3.1 billion of cash, nearly equal to its current market value of about $3.9 billion.

TD Cowen biotech analyst Werber likes three companies developing cancer treatments that now trade at or below the cash on their balance sheet. They are Nuvation Bio and Foghorn Therapeutics, which are targeting lung cancer, and Relay Therapeutics, which is developing a treatment for breast cancer. He says the Relay drug, which has had positive Phase 2 results, could successfully go head-to-head with a similar drug from AstraZeneca that is also in clinical trials.

Rezolute is developing a drug for low blood sugar, or hypoglycemia, caused by the rare inherited disease congenital hyperinsulinism. The stock trades around $3, and Rezolute has a market value under $200 million -- compared with about $100 million of cash. Jefferies analyst Maury Raycroft favors the stock with a $16 price target, citing the potential of the company's lead drug, which has had success in treating hypoglycemia caused by cancer-driven hyperinsulism.

Fate Therapeutics is developing several drugs, including one for lupus, and trades under $1 even though it sits on $307 million of cash, roughly triple its market value. Jefferies analyst Yee favors it, citing its CAR-T immunotherapy platform. He has a Buy rating and $8 price target on the stock. One reason for the depressed price is that CAR-T is currently out of favor with investors.

So is gene therapy, which can elegantly cure genetic diseases by fixing faulty DNA. Shares of Editas Medicine, a leader in the formerly hot, gene-editing Crispr technology, have fallen to $1 from a 2021 peak of $100. It's now valued at about $100 million, less than the $269 million of cash on its balance sheet at the end of 2024.

Another, Ginkgo Bioworks, is also down 99% from its peak to about $5. The company is a pioneer in "synthetic" biology, which involves the programming of cells for therapeutic and commercial purposes. It's now valued at $331 million, less than 60% of its cash position, and has invested over $1 billion in its technology.

These stocks might not all pan out, but at these fire-sale prices, they don't need to.

Write to Andrew Bary at andrew.bary@barrons.com

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April 04, 2025 01:00 ET (05:00 GMT)

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