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Wolfe Research warned investors on Thursday that the biotech sector is still in what it called a “nuclear winter.” Even though overall markets have been recovering, smaller biotech firms remain squeezed by weak funding and ongoing policy uncertainty.
One of the biggest questions hanging over the industry comes from Washington. Reports suggest the Trump administration is weighing new rules that could put U.S. drug deals with Chinese firms under national security review. Wolfe’s policy analyst Tobin Marcus said these measures could be mild or more severe, but it is unlikely that the harshest ideas would actually go into effect.
Among the more realistic steps could be government efforts to boost U.S.-based production of commodity drug ingredients, also known as APIs. On the other hand, more extreme actions, such as forcing Chinese firms to give up intellectual property, were described as highly unlikely.
The market reaction has so far been muted. Shares of ONC tumbled 12 percent before the opening bell and remained down about 8 percent during the day. The broader XBI biotech index slipped 1.2 percent. Wolfe said it expected more excitement, but investor sentiment is cautious and lines up with Marcus’s view that any new policies are likely to be on the milder side.
Funding remains the sector’s biggest problem. Smaller biotech players are struggling to raise capital as mergers and acquisitions slow down. That creates what Wolfe called a vicious cycle, with fewer IPOs and less investor interest weighing on the industry.
Still, the firm reiterated its bullish stance on several commercial biotech names, including Madrigal Pharmaceuticals (MDGL), BridgeBio (BBIO), Ionis (IONS), and Incyte (INCY). But Wolfe also cautioned that policy support alone won’t be enough to pull the entire sector out of its downturn.