Although 5% up over one year, the S&P Biotechnology Select Industry Index is down .22% year-to-date. This seems to be a normalization period. Following the investment splurge during the viral scare, the biotech sector experienced the proverbial renaissance. In this context, identifying biotech stocks to sell is essential, as some may falter despite the sector’s overall growth.
At its peak in February 2021, the index reached $13,513 vs. its current $6,939, dropping 49%. After the Fed’s hiking cycle to curtail inflation of own making, biotech companies suffered a wave of restructuring and layoffs. Moreover, the Inflation Reduction Act (IRA) introduced new rules on how to price drugs, effectively discouraging major investments into new drugs.
In 2024, there is even greater uncertainty about whether the economy will head into a recession or stagflation or whether the Fed will cut rates or keep them up for longer. That bodes ill for the capital-intensive sector chasing down skittish capital. In the meantime, the government picked up the slack as U.S. NIH increased by 8.3% into 2023.
As of March, 44% of healthcare professionals relayed optimism about the biotech sector, 12 months ahead, according to GlobalData’s Thematic Intelligence report. But as some biotech stocks reap their drug pipeline gains, which ones are more likely to run out of cash?
Let’s explore the top three biotech stocks to sell based on their financial outlooks and market performance.
Rallybio (RLYB)
Typical for volatile penny stocks, Rallybio (NASDAQ:RLYB) rallied to $2.98 mid-April, only to fall down to its present $1.85 per share. But given its 52-week low of $1.23, that is still up 33%. Year-to-date, RLYB stock is down nearly 22%.
The fleeting spike was attributed to the company’s partnership with Johnson & Johnson (NYSE:JNJ) on April 10th, related to new treatments for fetal and neonatal alloimmune thrombocytopenia (FNAIT). In contrast to Rallybio’s challenges, J&J’s sales rose to $21.4 billion with a 7.7% operational growth, excluding its COVID-19 vaccine impact, and earnings per share increased to $2.71, up 12.4%. That highlighted the financial stability and growth of J&J amidst the same market conditions.
Yet, as Rallybio failed to deliver a single profitable quarter since, its net losses steadily increased. For the fiscal year of 2023, the company reported this March that it will “continue to incur net losses and negative cash flows in the foreseeable future”. In total, Rallybio left the year with $9.4 million in total liabilities vs. equity of $106.2 million (a 37% reduction from 2022).
RLYB’s total net loss increased from $66.6 million in 2022 to $74.5 million in 2023. In efforts to treat FNAIT, its novel RLYB212 drug is expected to enter Phase II trials on pregnant women in the second half of 2024. Unlike Pfizer (NYSE:PFE), though, the company lacks a wider spectrum of drugs. In turn, this will likely cause only temporary and speculative valuation spikes.
Sanofi (SNY)
The French Sanofi (NASDAQ:SNY) comes as an ADS exposure to the biotech sector. Unlike biotech penny companies, Sanofi is more diversified, operating across consumer healthcare products, prescription drugs and vaccines. However, it is precisely this generic diversification that makes the company vulnerable to competitors. This vulnerability, highlighted by its recent financial performance and strategic shifts, places Sanofi on the watchlist of biotech stocks to sell, as investors might consider the risks associated with its restructuring efforts.
Year-to-date, SNY stock flatlined at a 1.5% performance. At the present price level of $50.10, SNY is just 17% above its 52-week low of $42.63 per share. This April, the company confirmed its prior announcement to begin a “full pipeline reprioritization project”. That consists of cutting the workforce and establishing a “simplified R&D structure”.
Sanofi’s big bet is to pull back on research and invest more in deployment. Specifically, to ramp up Phase 3 trials by 50% over the next two years. The problem is that not only is Sanofi in competition with Pfizer, Johnson & Johnson, Novartis (NYSE:NVS) and Merck (NYSE:MRK) but also with small to medium-sized enterprises (SMEs).
More lean and agile, SMEs for novel therapies have mustered a significant resurgence in Europe. Compared to the 40% drug approval rate in 2016, it skyrocketed to an 89% success rate in 2021, per European Medicines Agency (EMA) reporting. This dynamic eventually prompted Sanofi to completely revamp its drug pipeline.
At the end of April, Sanofi delivered its Q1 2024 earnings, showing a 17.8% decline in net income. Moreover, the company’s free cash flow decreased by 120.1%. As Sanofi reprioritizes from oncology to immunology and Pfizer aggressively pushes with the acquisition of Seagen, SNY stock will likely reflect it in the long run.
BenevolentAI (BAIVF)
As a cautionary penny stock tale, investors should look at the British BenevolentAI (OTCMKTS:BAIVF), a prime example of biotech stocks to sell. Riding the ongoing AI hype, the company aims to create an AI-powered drug pipeline to both discover and aid in developing novel treatments.
The problem is that such a powerful AI solution will likely emerge from heavyweights like Meta (NASDAQ:META), Amazon (NASDAQ:AMZN) or Microsoft (NASDAQ:MSFT), leaning on their costly data centers to train AI models. Seeing the scale of the endeavor, BenevolentAI already started reducing its workforce in May 2023.
Despite collaborations with AstraZeneca (NASDAQ:AZN), Merck and Eli Lilly (NYSE:LLY), the startup is rapidly burning cash. In its March earnings report for full-year 2023, 2022’s net book value of £364.8 million deflated to £112 million. For the year, BenevolentAI delivered a £317.5 million loss, left with nearly halved cash at the bank and in hand of £4.6 million.
When looking at the prospect of these types of companies, investors should seek exposure to bigger players with deeper pockets. Case in point, Amazon launched multiple healthcare layers, from online pharmacies and virtual clinics to telehealth services. Most importantly, AWS is the leading cloud hosting solution for generative AI and ML, for which startups like BenevolentAI rely.
On the date of publication, Shane Neagle did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.