My Account

Small-Cap Biopharma: Down, But Not Out

Scientists in a lab.

Key Takeaways

After solid gains in 2020, small-cap biopharma stocks have been on a prolonged slide.

Biopharma firms face several challenges, including adverse clinical trial results and a harsh regulatory environment.

We think the current headwinds facing biopharma companies will subside, setting up the potential for a rebound.

Biopharma Tackles Unmet Medical Needs

Most of us have benefited personally from the work of innovative biotechnology and pharmaceutical (biopharma) companies. Notable recent examples include COVID-19 vaccines and treatments.

Historically, breakthroughs such as these have benefited biotech investors as well. Though the industry has hit a rough patch lately from a stock performance perspective, we think the long-term outlook for biotech companies is favorable.

Biopharma Has Taken It on the Chin

The small-cap biopharma industry got a boost as investors favored companies working to develop vaccines and treatments for COVID-19, as well as those working on other potential medical breakthroughs. They rose nearly 53% by the end of 2020 compared to a 19% rise for small companies generally, as measured by the Russell 2000® Index. Since the beginning of 2021, however, small-cap biotech companies have declined 57% while the Russell 2000 declined 12%.1 See Figure 1.

Figure 1 | Biopharma Stocks Are in a Bear Market

This chart shows that biopharma stocks are in a bear market. Since the beginning of 2021, small-cap biotech companies in the Russell 2000 Index have declined 57% while the broader Russell 2000 Index has declined 12%.

Data from 12/31/2020 – 4/30/2022. Source: Bloomberg. Indices rebased to 100 as of 12/31/2020. The Russell 2000 Biopharma Sector is the return of two industries within the Russell 2000 Index: pharmaceuticals and biotechnology.

What Factors are Affecting Biopharma?

In our view, the factors contributing to biopharma’s drop include:

Adverse Clinical Trial Events and FDA Decisions

Disappointing clinical trial results and a harsher regulatory environment have led to unpleasant surprises for drugmakers. While the U.S. Food and Drug Administration (FDA) may keep a firmer approach to industry oversight, history shows the regulatory pendulum can swing to a more moderate approach.

Expectations for Higher Interest Rates

Rising interest rates, which make more speculative investments less attractive, have weighed heavily on the lofty valuations of this largely unprofitable group of companies. In January 2022, the Federal Reserve signaled a more aggressive withdrawal of its economic policy support and implemented two increases in the federal funds rate as of May.

Accelerated Outflows

In a dramatic reversal of 2020’s significant inflows, outflows from the ARK Genomic Revolution ETF and other health care-themed funds have pressured small-cap biopharma stocks.


The voracious appetite for biopharma investments led to a record number of initial public offerings in 2020 and 2021, many of which were early stage. The number of publicly traded small-cap biopharma companies swelled to 350 at the end of 2020, creating a glut of potential investments just as investor interest waned.

Despite These Headwinds, We Have a Positive Long-Term Outlook for Small-Cap Biopharma

Even though the biopharma pullback has been substantial and protracted, we remain optimistic about the industry for reasons that include the following:

Significant Rebounds Have Historically Followed Strong Pullbacks

Since peaking in February 2021, biopharma stocks in the Russell 2000® Growth Index slogged to a decline of -64% as of April 30, 2022. This performance compares to an average biopharma drawdown of ‑32% over 126 days. See Figure 2. Our analysis further reveals 11 declines of 17% or greater since the 2008-2009 financial crisis.2

After bottoming, the average historical rebound after six months has been 32% and 58% after 12 months. See Figure 3. The sector has historically outperformed the Russell 2000® Growth Index by 17% on average during the subsequent 12 months.3

Figure 2 | Biopharma Pullbacks Can Be Deep and Prolonged

This chart shows that since peaking in February 2021, biopharma stocks in the Russell 2000® Growth Index slogged to a decline of -64% as of April 30, 2022. This performance compares to an average biopharma drawdown of  32% over 126 days.

Data from 2/1/2021 – 4/30/2022. Source: Bloomberg.

Figure 3 | Historical Biopharma Rebounds Have Been Sizable

This chart shows that after bottoming, the average historical rebound for biopharma stocks after six months has been 32% and 58% after 12 months.

Data from 9/22/2009 – 4/30/2022. Average return of all 6- and 12-month drawdowns of 20% or greater since 2009. Source: Bloomberg.

Robust Pipeline of New Drugs

The number of disease-fighting biologics and small-molecule drugs in development is at an all-time high. Furthermore, small biopharma companies are at the forefront of evolving technologies like cell therapy, gene editing and protein degraders, leading to the next generation of blockbuster drugs.

Potential Acquisitions on the Horizon

Mergers and acquisitions of small-cap biopharma companies may be poised to accelerate. Big Pharma is flush with COVID-19 vaccine cash that could be deployed in many ways, including paying down debt, raising dividends, buying back shares or buying smaller firms. This may make small-cap biopharma firms attractive acquisition targets.

Pfizer’s high-premium acquisitions of Arena Pharmaceuticals and Biohaven Pharmaceutical for $6.7 billion and $11.6 billion in December 2021 and May 2022 may be signs of this development. The high valuations can raise acquisition precedents and attract investors to the industry. In addition, much of the acquisition capital often is recycled back into new or existing small-cap biopharma companies.

Advances in Science Support the Biopharma Industry

Innovation is accelerating, and scientific advancements lead to new ways to treat diseases. We believe the current, historic drawdown for small-cap biopharma companies may reverse course as the environment for these companies improves.

Jackie Wagner
Jackie Wagner

Vice President

Senior Portfolio Manager

Jeff Hoernemann, CFA
Jeff Hoernemann, CFA

Vice President

Portfolio Manager

Explore More Insights

Read our latest articles and market perspectives.

Bloomberg, April 30, 2022.

Bloomberg, April 30, 2022.

Bloomberg, April 30, 2022.

The information is not intended as a personalized recommendation or fiduciary advice and should not be relied upon for, investment, accounting, legal or tax advice.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.