New crash, new cycle, new Recovery.

An analysis of the behavior of the biotech and pharma market

Introduction

Since the end of 2021, the stock market has been in a bear market again, the third-largest since the COVID-19 crisis at the beginning of 2020, where the S&P 500 fell by approximately 20%. On the other hand, during the Subprime crisis and the subsequent recession, the S&P had a prolonged fall of 46.13% between October 2007 and March 2009. The difference between these two crises is mainly noticeable in the time the falls occur. and subsequent recoveries, the fall of the S&P 500 in the Subprime crisis lasted approximately two years, and the recovery three years showing a complete recovery in March 2013. On the other hand, the COVID-19 crisis showed a fall in the S&P 500 that lasted approximately four months, and the recovery from this crisis took place in just 3 months (Graph 1).

This new bear market, produced by the war between Russia and Ukraine, has led to a drop of approximately 14.5% in the S&P 500 from the beginning of the conflict to April 2022. Additionally, this warlike conflict generated inflationary phenomena worldwide that required using contractionary monetary policies to curb inflation but plunging economies and markets into further depression. In this context, it is interesting to observe the behavior of biotech and pharma companies in recessionary markets and how their key companies face these economic and market situations.

Graph 1. S&P fluctuations and crashes (Quarterly)

To analyze the behavior of the biotech and pharma markets with respect to the behavior of the market in general, it is important to consider two indices:

1) Biotech Index:

One of the main indices to understand the behavior of the biotech market is the SPDR S&P biotech ETF (XBI). This index replicates the behavior of the most important biotech companies included in the S&P 500. The five main holders of this ETF are Turning Point Therapeutics Inc.: Participation del 3.07%.

· United Therapeutics Corp.: Participation of 1,47%.

· Halozyme Therapeutics Inc.: Participation of 1,4%.

· Biohaven Pharmaceutical Holding Company Ltd.: Participation of 1.40%.

· Dynavax Technologies Corp.: Participation of 1.36%.

According to Ax3.bio estimates, the correlation of the behavior of this index with the S&P 500 is high, presenting a Pearson correlation coefficient of 0.91. In other words, the cycles of market falls and recoveries coincide between the index and the S&P 500. The accumulated growth of this index for the period 2006-2022 was 278.2%.

2) MVIS US Listed Pharmaceutical 25 Index

This index groups the 25 main pharmaceutical companies listed on the United States stock exchange (See Annex I). This index is made up of 56.64% of American companies and 10.12% of companies from Great Britain, the rest of the companies are from various origins such as Israel, Germany, Japan, Switzerland, etc.

According to the analysis of Ax3.bio, considering the price of this index or MVPPH. The price of this index has a high correlation with the S&P 500, presenting a Pearson correlation coefficient of 0.87. The accumulated growth of this index for the period 2006-2022 is 125.8%.

Market patterns and analysis

Although these two indices have similar movements to the S&P 500, the change in the magnitudes of the indices differs from those of the S&P. It is important to note that the three indices show a growing trend over time, that is, they are profitable investments in the long term. If this trend is considered, the S&P 500 and the XBI would give higher returns in a shorter period of time, since the growth of the long-term trend is faster than that of the MVPPH (Chart 2).

Chart 2 . S&P, MVPPH, and XBI Cycles and trends (Quaterly)

Regarding behavior in bearish and bullish markets, a curious behavior can be observed in the magnitudes of the fluctuation of these indices.

The stock market crashes observed in the S&P 500 are each time smaller in magnitude and occur over a shorter period. For example, in the subprime crisis, the fall of the S&P was approximately 45.66%, in the crash caused by COVID-19 that fall was 20% and the fall in the current bear market is, so far, 14.5%. This fact is replicated by the MVPPH, which presented a drop of close to 32% in the subprime crisis, 16% in the COVID crisis, and 6% in the current bear market. This trend had also been respected by the biotech market, the XBI index showed drops of 19% with the subprime crisis, 18% with the COVID crisis, and in the current bear market, the drop in this index is almost 44%. %, losing relation to the dynamics presented by the other two indices (Table 1).

As for the recovery periods, in all three indicators, the market rises after a sharp drop are less and less, both for the S&P and for the biotech and pharma markets. For this reason, these markets are expected to recover, in line with recovery forecasts, as Ax3.bio mentioned in previous reports and notes estimating a compound annual growth rate of 9.6% for the biotech market and approximately 16% for the epharma market, which would lead to a recovery of these markets, despite the fall they suffered, mainly the biopharma market, due to the war between Russia and Ukraine.

Table 1. Crashes and Recovery Markets by Index

Source: Ax3 bio elaboration with Reuters data.

Conclusions

Although the market in general and the pharma and biotech markets are showing a fall, a cyclical behavior can be observed. After each fall, there is a recovery and subsequent growth of the markets, thus marking a long-term trend. According to the estimates made in previous works, Ax3.bio expects a marked and rapid recovery of the biotech and pharma markets due to their growing projections of market size growth. In short, the market is going through a momentary decline that will be quickly reversed by sustained growth due to the characteristics of each market.

Methodology/used equations:

1) Percentage Change

Annex 1. List of companies inside of MVIS US Listed Pharmaceutical 25 Index