Investors are increasingly sceptical of biotech stocks, which have been down on the Nasdaq 12.38% over the past year, and many regard the sector as a risky investment that should be avoided. However, the sector is crucial to society and shares in biotech and healthcare are defensive stocks that aren’t affected by market movements to the same degree as energy or consumer discretionary items.
Unlike social media stocks, healthcare innovation is important at all points in the economic cycle. If investors focus on the fundamentals of companies and play the long game, there are good reasons to hold on to biotech stocks during a recession. Clinical trials take years, and investors in this climate prefer the sugar hit of a straightforward stock that delivers in the near term or at least holds its value.
However, when health innovation succeeds, it is a win-win for all players. Companies need to be cognisant that they may have to raise capital at a lower price and face dilution in a recession, but smaller biotech companies will still need investment. There are still big deals being done, with some good drugs and diagnostics coming through.
The impact of the pandemic on the sector itself and on investor sentiment is hard to calculate. COVID had a major impact on clinical trials and drug manufacturing for a couple of years, and many biotech staff have been unable to work in a team environment because of lockdowns. However, the knock-on effects for other health innovations and related industries, such as telehealth, are substantial.
