Can Biotech Survive The Looming Patent Cliff?

The biotech industry has faced a pretty relentless decline after soaring in the first year of the pandemic, but traders saw stocks finally stabilize over the trailing 12 months. Is this the early days of a rebound or just another false start in an industry facing a historic patent cliff and new drug price regulations?

Year of the Patent Cliff Could Reshuffle Biotech

Several high-profile drugs are losing patent protection this year, opening up the market for generic alternatives to name-brand treatments. This could be an opportunity for small and mid-cap* biotech stocks to absorb some of the profit from large-cap stocks that had previously benefited from market exclusivity by putting out biosimilar competitors.

Takeda (NYSE: TAK), for example, is facing a patent cliff for Vyvanse. The popular ADHD treatment is the company’s third best-selling drug so the loss of market exclusivity could possibly deal a serious blow to the stock. A generic competitor from Norwich Pharmaceuticals could be on the market as soon as August.

Other patent cliffs coming this year include Johnson & Johnson’s Stelara, Merck’s Januvia and Janumet, Roche’s Actemra, and AstraZeneca’s Symbicort. All of them face competition from generics ready to launch almost as soon as their patent protections expire.

While this is bad news for those individual stocks, it’s likely a boon to the overall sector. The companies launching the generics could see a substantial boost to their stocks. Meanwhile, a flood of more affordable drugs is likely to increase revenue industry-wide as more patients are able to afford the treatments. That revenue just won’t be as concentrated under one stock anymore.

Recession Fears Not Expected To Worry Biotech

Like the energy sector, biotech companies tend to be less susceptible to economic downturns. While these sectors aren’t immune, they produce assets that people need regardless of the overall strength of the market. In biotech’s case, life-saving treatments are an essential that will always be in demand in any market.

While this bolsters the bull case for the sector, its widely known recession-resistance may make biotech stocks increasingly attractive to traders after any whiff of a potential recession. With the Conference Board’s recent forecast that a recession could start as soon as this summer, traders are on high alert for any sign of a weakening market and are likely to be rebalancing their portfolios toward more resilient sectors, like biotech. Those trends make for great bull trade opportunities for short-term traders.

Medicare to Announce First 10 Drugs Selected For Price Negotiation In September

In an effort to combat exorbitant drug prices, the Inflation Reduction Act gave the Centers for Medicare and Medicaid Services the authority to negotiate prices for drugs widely used by Medicare and Medicaid recipients.

The lower prices won’t take effect until 2026, but the September 1 announcement naming the first 10 drugs to fall under the new program is likely to punish share prices of the stocks affected as shareholders worry that typically stable profit margins could shrink. Other key dates, including the announcement of maximum fair prices and the addition of more drugs to the list, are further out but worth adding to the calendar for bearish trade opportunities.

Trade Biotech’s Recovery Attempt with Direxion’s Biotech Bull and Bear ETFs

For traders looking to maximize yield on both the bullish and bearish movements anticipated in the coming months, consider adding Direxion’s Daily S&P Biotech Bull (LABU) and Bear (LABD) 3X Shares. The leveraged ETFs seek 300% or -300% investment results, respectively, before fees and expenses, of the daily performance of the S&P Biotechnology Select Industry Index*. There is no guarantee the funds will meet their investment objective.

With 3X leverage, traders can turn even small movements in the sector into meaningful yield by seeking to magnify every trade they make. That 3X magnification will increase losses as well as gains, so it’s still important to use these ETFs with a well-tested strategy and monitor trades closely. However, when used carefully for short-term trading, both LABU and LABD offer investors the opportunity to increase exposure to a sector that experiences the counter pulls of both significant headwinds and tailwinds.

*Definitions & Index Descriptions

Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.

The S&P Biotechnology Select Industry Index is provided by S&P Dow Jones Indices LLC and includes domestic companies from the biotechnology industry. The Index is a modified equal-weighted index that is designed to measure the performance of the biotechnology sub-industry based on the Global Industry Classification Standards (GICS).

The "S&P Biotechnology Select Industry Index" is a product of S&P Dow Jones Indices LLC ("SPDJI"), and has been licensed for use by Rafferty Asset Management, LLC ("Rafferty"). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC ("S&P"); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Biotechnology Select Industry Index.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. The Funds are non-diversified and include risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geography which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Tax Risk, and risks specific to the securities of the Biotechnology Industry and Healthcare Sector. Companies within the biotech industry invest heavily in research and development, which may not lead to commercially successful products. Additional risks include, for the Direxion Daily S&P Biotech Bull 3X Shares, Daily Index Correlation Risk, and for the Direxion Daily S&P Biotech Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.