Biotech Stocks Are Up. The Sector Is Looking Better Than It Has in Years.

(Dreamstime)

Key Points

• The SPDR S&P Biotech exchange-traded fund (XBI) has increased 8.9% since September 25, now up 15.9% for the year.
• Biotech’s recent surge is attributed to a drug-pricing deal and acquisitions, raising hopes for a sector recovery after a long downturn.
• Analysts suggest the current biotech rally might be sustainable due to increasing profitability and clearing structural problems.

Something unusual is happening with biotech stocks: They are going up.

The SPDR S&P Biotech exchange-traded fund, which tracks a broad selection of biotech names, has shot up 8.9% since September 25, just more than a week ago.

Often referred to by its ticker symbol, XBI, the ETF is now up 15.9% on the year, outperforming the S&P 500 index, which is up 14.4% over the same period. That’s a remarkable run for a sector that hasn’t had much going on since early 2021.

The biotech run-up over the past week or so has been fueled by the same drug-pricing deal between Pfizer and President Donald Trump that set off a surge in Big Pharma share prices last Tuesday, along with a spate of acquisitions.

But there have been plenty of acquisitions over the past few years, and a fair number of weeks of good drug-policy news, and it’s been half a decade since biotech stocks have shot up like this. This time might be different. The surge is raising hopes on Wall Street that things may finally be thawing after biotech’s long, cold winter.

“Investors are naturally jittery, since prior rallies haven’t been sustained,” Cantor Fitzgerald analysts Josh Schimmer and Eric Schmidt wrote in a note on Friday. “But we’re also in uncharted territory with a sector that is increasingly profitable. Maybe this time it is for real?”

The biotech sector entered the doldrums in early 2021, nearly five years ago. Biotech stocks had run up in 2020, the first year of the Covid-19 pandemic, as low interest rates and an intense focus on the biopharma industry sent investors rushing into the sector. That bubble popped in February of 2021, and the XBI was down by more than 50% by the following June.

Since then, biotech stocks have floundered. The sector, always risky, has seen funding dry up, companies fold, and enthusiasm evaporate. The biotech story was a grim one, with no clear way forward. Too many biotech startups—many of them of questionable quality—had gone public during the pandemic boom, which left lots of specialist cash tied up with unprofitable, dead-end names. Meanwhile, higher interest rates meant less generalist cash for speculative bets on cutting-edge science.

The XBI climbed around 7% in 2023, while the S&P 500 rose more than 24%, and it was flat in 2024, when the S&P was up more than 22%.

Now, there are signs that some of the structural problems that have dogged the sector are clearing. A wave of shutdowns of struggling smaller biotechs has freed up specialist capital, and worries about the Trump administration’s drug-price ambitions seem to be easing. Interest-rate cuts, meanwhile, could move generalists back toward riskier sectors such as biotech.

“Biotech specialists became increasingly optimistic through September as the rally off of the early April lows continued,” TD Cowen’s biotechnology team wrote in a note published last Wednesday. “After several quarters of seemingly being buffeted by headwinds from all directions, hope is building that the macro factors could finally be turning in biotech’s favor.”

One big reason to remain optimistic about the sector over the coming months is that Big Pharma companies are in dire need of drugs to pad their pipelines, as drugmakers such as Pfizer, Merck , and Bristol Myers Squibb contend with looming patent cliffs.

That means M&A sprees are likely, and an improving political and macroeconomic context could allow the rest of the sector to climb when those deals come.

“While deal making remains difficult to predict in terms of both timing and target alike, the adversarial political climate potentially easing a bit should be more helpful than not in the context of increased business development,” Mizuho Healthcare Equity Strategist Jared Holz wrote in an email to investors on Friday.

On Monday, enthusiasm for the sector seemed to be persisting. The XBI was up 0.8% on Monday morning, while the S&P 500 was up 0.2%.

Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com