In the financial markets, it is often said that cash is king. This is something to remember when dealing with the world of biotechnology due to the expensive nature of developing new drugs and therapies.
As a result, analysts and investors often monitor the cash burn rates of biotech companies, as these companies can quickly burn cash, which is by no means a guarantee of success on the clinical trial front.
For investors considering biotech exposure, cash burn issues ALPS Medical Breakthroughs ETF (SBIO) relevant, especially as analysts note that many biotech companies only have enough cash to last until the end of this year.
In a recent note, Morgan Stanley analyst Matthew Harrison and his team point out that there are 21 biotech companies that need $36 billion in cash.
“Investors fear that the funding needs of biotech companies will further weigh on the biotech market,” according to Morgan Stanley.
Market participants are right to express this caution, as biotech companies with financing needs often lag behind competitors who do not need to raise capital. This makes SBIO all the more enticing as the ETF’s index – the S-Network Medical Breakthroughs Index – requires member companies to have enough cash to survive two years at current consumption rates.
“The forecast is based on a sample of 380 U.S.-listed biotech companies with a market capitalization of more than $100 million as of March 15. About 15% of companies with positive operating cash flow do not were not included in the final analysis,” Seeking Alpha reports. “However, analysts acknowledged that the projection may have excluded some of the companies that achieved significant milestones in 2021, which are unlikely to be repeated in 2022. It may also have underestimated funding requirements given that the analysis is retrospective, they added.”
The publication highlights 16 stocks that could fit Morgan Stanley’s parameters as biotech names that may need to raise capital this year. Only three – Anavex Life Sciences (NASDAQ:AVXL), Vaxart (NASDAQ:VXRT) and Geron (NASDAQ:GERN) – are members of the SBIO lineup. Fortunately, this trio combines for only 1.55% of SBIO’s weight.
This is a strong indication that while SBIO is not perfect, it mostly avoids companies that need to tap into capital markets just to survive.
Other biotech ETFs to consider include VanEck Vectors Biotech ETF (BBH)the iShares Biotechnology ETF (IBB)and the ETF Virtus LifeSci Biotech Clinical Trials (BBC).
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.