Biotech stocks are in a post-pandemic slump and recovery in 2024 is questionable

By Jurica Dujmovic

Once buoyed by demand for COVID-19 vaccines and treatments, the biotech industry is experiencing a sobering leveling out

Novavax (NVAX) stands out as a stark reminder of the biotech sector's faltering steps in 2023. Once renowned for its Nuvaxovid COVID-19 vaccine, the Maryland-based company is now grappling with financial issues, reflecting the broader challenges that continue to plague the pharmaceutical sector this year.

This dramatic fall from grace is emblematic of the volatility inherent in biotech. Novavax's stock trajectory tells a tale of highs and lows -- from peaking at close to $320 a share in February 2021 to now languishing below pre-pandemic levels. The company's financial health is waning, with a net loss of $1.7 billion in 2021 and an additional $658 million lost last year, despite having around $1.3 billion in cash on its balance sheet.

Novavax is not an isolated case of struggle in the biotech sector. The diminishing lift from vaccine sales concerns Wall Street, affecting other pharmaceutical giants. Shares of Pfizer (PFE), BioNTech (BNTX) and Moderna (MRNA), for example, have all experienced significant declines so far in 2023, underscoring the transient nature of pandemic-induced gains and the need for sustainable innovation and diversification.

These challenges are symptomatic of a larger trend within the biotech sector, where companies are grappling with a sugar crash -- a post-pandemic reality marked by normalized revenues and increased scrutiny. The industry, once buoyed by the demand for COVID-19 vaccines and treatments, is now experiencing a sobering leveling out.

This shift in fortunes is not just a story of revenue normalization and disillusionment with the promised vaccine effectiveness, but also a tale of looming uncertainties. The biotech sector is on the precipice of a steep patent cliff, as five significant product patents expired in 2023. The impending loss of patent protection for more than 20 products, worth nearly $200 billion in annual sales, by 2030 adds another layer of complexity to the industry's trajectory.

Regulatory pressures are also intensifying, with recent Federal Trade Commission (FTC) activity and the introduction of the U.S. Inflation Reduction Act (IRA) raising concerns about the potential stifling of innovation and implications for pricing and reimbursement. The industry is navigating a tougher regulatory landscape, as FDA approvals dropped in 2022, though returned to pre-pandemic levels in the first quarter of 2023.

Financing also has hit a rough patch, with all types of biotech financing experiencing a significant decrease since 2022. According to Ernst & Young, the biotech IPO market is down 93% compared to 2021, and around 29% of publicly traded biotech companies in the U.S and .Europe have less than one year of cash on hand. This constrained financing environment is a stark reminder for companies like Novavax, which, despite having cash on its balance sheet, continues to face financial challenges.

Add challenging economic conditions and the need to reduce costs to the mix and it's no wonder layoffs have become a common occurrence in the struggling industry. The workforce reductions are part of a concerted effort to navigate economic headwinds and lay the groundwork for sustainable growth. This is in keeping with a recent BDO report, which reveals a trend toward operational streamlining and cost mitigation.

Facing myriad challenges, including inflationary pressures and regulatory scrutiny, pharmaceutical companies are poised at a critical juncture. Success hinges on their ability to adapt, embrace technological advancements and navigate the complexities of drug pricing and mergers and acquisitions.

The industry's current predicament also raises questions about the sustainability of the gains experienced in the pandemic. While it's clear they were made in a darker and uncertainty-rife period, it's unrealistic to expect the same levels of revenue to continue in a post-pandemic environment. Therefore, a certain level of capital shedding is expected until companies lose excess bloat and restructure into sustainable businesses.

Companies that navigate this transition will be able to reap the benefits, as governments worldwide seem to be ramping up for even more aggressive and compulsive pharmaceutical response to potential future pandemics.

Also read: 12 stock picks from our healthcare roundtable pros. Weight loss isn't the only big deal in medicine.

More: Pfizer says Wall Street was right on Covid market

-Jurica Dujmovic

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10-21-23 1039ET

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