In financial markets, it’s often said that cash is king. That’s something to remember when it comes to the biotechnology universe due to the cost-intensive nature of developing new drugs and therapies.
As a result, analysts and investors often monitor cash burn rates among biotech companies because these firms can rapidly burn through cash, and that’s by no means a guarantee of success on the clinical trial front.
For investors considering biotech exposure, the cash burn issues make the ALPS Medical Breakthroughs ETF (SBIO) relevant, particularly as analysts note that plenty of biotech companies only have enough cash to last through the end of this year.
In a recent note, Morgan Stanley analyst Matthew Harrison and team point out that there are 21 biotech firms that need $36 billion in cash.
“Investors are worried that the funding needs of biotech companies could further stress the biotech market,” according to Morgan Stanley.
Market participants are right to express that caution because biotech companies with funding needs often lag rivals that don’t need to raise cash. That makes SBIO all the more alluring because the ETF’s index — the S-Network Medical Breakthroughs Index — requires that member firms have enough cash to survive two years at current burn rates.
“The forecast is based on a sample of 380 U.S. listed biotech companies with over $100 million of market capitalization as of March 15. About 15% of firms with positive cash flow from operations were not included in the final analysis,” reports Seeking Alpha. “However, the analysts acknowledged that the projection might have excluded some of the companies that had major milestones in 2021, which are unlikely to repeat in 2022. It may have also underestimated the financing needs given the analysis is backward-looking, they added.”
The publication highlights 16 stocks that could fit Morgan Stanley’s parameters as biotech names that could need to raise capital this year. Just three — Anavex Life Sciences (NASDAQ:AVXL), Vaxart (NASDAQ:VXRT), and Geron (NASDAQ:GERN) — are members of the SBIO lineup. Fortunately, that trio combines for just 1.55% of SBIO’s weight.
That’s a strong indication that while SBIO isn’t perfect, it mostly avoids companies that need to tap capital markets simply to survive.
Other biotech ETFs to consider include the VanEck Vectors Biotech ETF (BBH), the iShares Biotechnology ETF (IBB), and the Virtus LifeSci Biotech Clinical Trials ETF (BBC).
For more news, information, and strategy, visit the ETF Building Blocks Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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