Investors were laser-focusing on profit-producing companies, which left pre-revenue companies on the sidelines. As a result, an increasing number of biotech stocks are now trading at less than the value of cash on their balance sheets. Over the past year, the SPDR S&P Biotech ETF is down nearly 44%, while the iShares Biotech ETF has lost nearly 23% over the same period. Sharp rivalries, as well as the potential for mergers and acquisitions, could spark renewed interest in the sector, but analysts say it may be wise to remain defensive in the sector. Although some research biotechnology companies will inevitably yield valuable results, sorting out winners from losers is critical. Jared Holz, a healthcare equity strategist at Oppenheimer, told CNBC’s “Fast Money” earlier this week that the biotech sector needs to go through a “self-cleansing” process to redefine itself given there are too many “uninvestable” companies. or not viable. This may include companies that have had to stop trials or have submitted data that has not been shown favorably. “I think we’re getting to a point where some companies have to kind of have to face the facts and have to move on from someone or the program they started or … from being a company at all,” Holz said. Piper Sandler analyst Christopher Raymond expects that the true bottom of the sector has not been reached. As in other courses, group surrenders will be marked by distress signals such as closing boxes and outflows from the group, which have yet to be seen, he said. Instead, there was a drive toward quality that boosted valuations of big-cap biotech and drug stocks, he said. Even so, Raymond sees some reasonable entry points for the stocks, including big-cap Abbvie, mid-caps Argenx and Ultragenyx Pharmaceutical, while Cogent Biosciences is his favorite “under the radar” pick. It has overweight ratings on all four stocks. “I was amazed at the fact that a lot of really high-quality stocks, when you look at the stock chart, it looks like there was a failure or a catastrophic event,” Raymond said. This may be the case for Ultragenyx. Its shares are down nearly 40% since the start of the year, but there have been no fundamental changes to the company, which is focused on finding cures for rare genetic diseases. The company may have an update in an early trial of GTX-102 to treat Angelman syndrome, a genetic disorder that causes developmental delays and difficulty with speech and balance. Raymond has a target price of $135 per share, well above its current value of about $51. “If you succeed, [GTX-102] It will completely reshape this company. “Abbvie’s stock chart aligns with the trend in the sector. The stock has outperformed, with its shares up nearly 9% year-to-date. Piper Sandler sees up more than 8%, with a target price of $160 Raymond’s optimism comes from his outlook for Rinvoq, a treatment for rheumatoid arthritis.Its outlook for drug sales outperforms Wall Street’s long- and short-term view.Analyst Matthew Harrison said his focus has been on mid-market growth names that already have one or two approved products or are in the process of launching a product, meaning That companies are somewhat defensive because there is revenue coming in, but it’s at the same time the beginning of their growth cycle. BioMarin Pharmaceuticals, Argenx and Seagen are three examples cited by Harrison.” “These growth names are the place to put them because they provide passive support, in addition to providing passive support,” Harrison said. “Upside down when the market turns.” BioMarin shares are down about 12% since the beginning of the year, and the stock is currently trading at the lower end of its 52-week range. The company is beginning to see the benefits of releasing Voxzogo, the only approved treatment for children with achondroplasia, the most common form of short limb dwarfism. In April, BioMarin raised its sales forecast for the drug. Its other major product, Roctavian, is a gene therapy for hemophiliacs. The product faced some setbacks, as the Food and Drug Administration requested more information from the company. A resubmitted application is expected by September. In Europe, approval of the treatment is expected this summer. Key to investors: BioMarin expects to report a profitable 2022, and should generate more than $2 billion in revenue this year. Morgan Stanley has a target price of $113 per share, which means that the upside is more than 46% for investors. Shares of Argenx, which focuses on treatments for autoimmune diseases, made up for the losses. It is currently down less than 10% since the beginning of the year. The company is in the midst of launching Vyvgart to treat myasthenia gravis, a rare neuromuscular disorder. In addition, the company hopes to gain approval for use of the drug for up to 10 other indications. Argenx said in its latest quarterly report that some of these trials are already in progress, and preliminary data from five trials are expected by the end of the first quarter of 2023. “You have all these strains of catalysts to expand the potential market size of this drug,” said Harrison. But the headline index is a billion-dollar plus index and they’re off to a very strong start.” He has a price target of $375 for Argenx, which is about 18% more than where the stock is currently trading. Raymond Piper has set his price target even higher, at $415, with Argenx expected to continue to top estimates. Seagen’s stock is also down less than 10% since the start of the year. The company recently appeared in the news due to the departure of co-founder and CEO Clay Segal, who resigned in mid-May after allegations of domestic violence surfaced against him. On a temporary basis, Siegall was replaced by the company’s chief medical officer, Roger Dansey. Seagen has four approved products in its portfolio, including Tukysa, a breast cancer treatment that is also being considered for other types of cancer, including colorectal. Harrison anticipates that the results of the Seagen’s Cohort K study will be a potential catalyst for the stock. The study hopes to expand the use of another compound, Padcev, to treat bladder cancer. If the drug is successful, it can be used on newly diagnosed patients. Currently, the drug is used on patients with metastatic urothelial carcinoma, who have not been successful with previous treatments. “This newly diagnosed market is clearly much bigger,” Harrison said. “So if this data works, sometime in the second half of the year, it opens up the possibility of … billions of dollars in new sales potential.” Morgan Stanley has a $173 price target on Seagen, which is more than 23% higher than the price it is currently trading at. The outlook for mergers and acquisitions Seagen is also a name that appears when the discussion turns to mergers and acquisitions in the biotech sector. But so far this year there has been a dearth of deals. One of the factors hanging over the industry was the regulatory environment. The Federal Trade Commission and the Department of Justice are holding a two-day workshop in mid-June to discuss the impact of mergers and acquisitions on competition and innovation in the pharmaceutical industry. Analysts hope the meeting will shed more light on how regulators view consolidation in the space. Raymond said he would watch the workshop. “There is an oversupply of companies, so mergers and acquisitions, you know, are part of the maturation process of any industry,” he said, adding that blocking a merger “distorts the market.” Deals have begun to pick up recently with Pfizer inked a deal in May to buy migraine drug developer Biohaven Pharmaceutical for $11.6 billion. Bristol-Myers Squibb on Friday announced plans to acquire Turning Point Therapeutics for $4.1 billion, in a bid to bolster its portfolio of cancer treatments. Bristol said it expects Turning Point’s flagship drug, ribotrectinib, to become standard care for patients being treated for non-small cell lung cancer when it is approved, which could happen by the second half of next year. The potential for mergers and acquisitions is one of the reasons investors prefer the biotech sector, so it’s encouraging to see some action on this front. Oppenheimer-Holz said that major pharmaceutical companies are looking to buy out biotech companies that have shown consistent revenue growth over five to 10 years. With that in mind, he expects there will be 15 to 30 companies with the biotech world that could be targeted. The list will include companies such as Vertex Pharmaceuticals, Seagen, Horizon Therapeutics, Incyte and Neurocrine Biosciences, Holz said. The hard part is that ratings for some of these larger biotech companies remain pretty high compared to the rest of the group. Vertex, for example, has seen its shares rise 23% over the year so far, while Neurocrine shares are up about 12% since January. Funding pressure Without deal activity, investors are likely to be more concerned about funding needs. At the moment, there has been a very significant decrease in the frequency of secondary performances. In March, Morgan Stanley analyzed 380 biotech companies to reach their cash needs. In the report, Harrison said he expects 30% of the group to have one year of cash or less by the end of 2022. With most investors preferring companies to have two years of cash on the balance sheet, reaching this benchmark typically leads to a need to raise money. Harrison estimated that the companies combined would need about $36 billion. The time period 2018-2021 was the peak period for investment in the biotech sector, and this pace is not likely to be repeated in the near term. Harrison said the number of companies needing to raise money was similar to the period prior to 2018, but the amount of money required is higher. Another backlog of the group was the recurring discussion about potential policy changes that could affect drug pricing. In a research note Thursday, RBC Capital analysts warned that drug pricing controls may be discussed as the Senate considers a reconciliation package over the next two to four weeks. This controversy could affect the sector as stocks try to recover. The RBC expert said there is a “better than 50-50 chance” of passing the drug-pricing bill by 9/11. 30 deadline. “Overall, we believe the risks of a re-emergence of drug pricing legislation are underappreciated on the street, and could have an impact on biotechnology at scale (and perhaps even more so on pharmaceuticals),” the analysts wrote.