Why did biotech shares underperform in 2022 and will they rebound with a vengence in 2023?

In the past year, biotech shares have performed poorly. Why has this been the case and will things be better in 2023?

 

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1. Investor distaste for high risk assets

For one, investors have been put off by the high risk associated with investing in biotech shares as these companies are often reliant on large upfront investments with no guarantee of a return.

Additionally, many biotech companies are still in the development stages of their product pipeline and thus haven’t begun to generate revenue yet.

This is a riskier proposition than investing in more mature companies that already have established products and services generating income.

 

2. Individual company setbacks

Some individual biotech shares had individual setbacks and this had an impact on the whole sector, dissuading investors from investing in other companies.

In particular, companies that benefited from the pandemic saw those benefits dry up.

Companies providing COVID tests for example, from rapid test kit maker Atomo Diagnostics (ASX:AT1) to pathology company and PCR test provider Sonic Healthcare (ASX:SHL) all saw falling revenues from those products.

Turning to biotech shares that were and are striving for regulatory approval, several had setbacks.

For instance, Cyclopharm (ASX:CYC) hoped for FDA approval for its lung imaging agent Technegas in 2022. However, the FDA instead gave the company a request for further information.

Lumos Diagnostics (ASX:LDX), meanwhile, had its respiratory diagnostics test completely rejected.

Nonetheless, there were some biotech shares that were approved by regulators, particularly Neuren Pharmaceuticals (ASX:NEU).

 

3. Sector competition

Another factor driving down biotech shares has been the emergence of impressive alternative treatments.

Examples include gene therapy, immunotherapy and cell therapy which offer more accurate diagnosis and effective treatments at lower costs when compared to traditional medications.

These new treatment options have created an increased level of competition for existing therapies leading to market saturation and downward pressure on pricing.

 

4. Uncertainty about the future

Furthermore, looming uncertainty regarding healthcare reform policies has created an environment of fear among investors.

The invention of new technologies such as AI analytics are also threatening current revenue streams due to higher cost efficiencies compared to manual labour operations currently used in many labs and research facilities.

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Check our buy/sell tips on the Biotech Shares in ASX

So, will this year be better for biotech shares?

Overall, these factors combined have led to decreased confidence among investors resulting in negative returns for biotech shares over the last year. But will 2023 be better?

It is difficult to give a definitive answer for the entire sector. However, we expect the sector to deliver its fair share of winners and losers this year.

Established companies with proven products will likely be safe investments, barring unexpected setbacks. Companies developing products or trying to gain regulatory approval offer more far more upside potential if all goes according to plan, but far more downside risk if it doesn’t.

In the end, while there will always be inherent risks when investing in biotechnology shares, long-term lucrative opportunities remain for those willing to accept the risk associated with this volatile sector.

 

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