What happened
After a blistering start to the year, small-cap biotech stocks made a U-turn in the second week of February. Speaking to this point, shares of the optical genome mapping company Bionano Genomics (BNGO -2.78%), the next-generation DNA sequencing company Pacific Biosciences of California (PACB -3.63%), and the genomics medicine company Sangamo Therapeutics (SGMO -2.66%) all tumbled by double digits through the first four days of trading this week, according to data provided by S&P Global Market Intelligence.
Prior to this downturn, Bionano Genomics, Pacific Biosciences of California, and Sangamo Therapeutics were all up by double digits for the year.
So what
What's behind this sudden trend reversal? From a macro perspective, every major U.S. stock index turned southward this week in response to a host of underwhelming corporate earnings reports, rising oil prices as a result of the conflict in Ukraine, and rising borrowing costs. A more nuanced look at the markets, however, reveals that small-cap stocks were particularly hard-hit this week.
Small-cap companies like Bionano Genomics, Pacific Biosciences of California, and Sangamo Therapeutics often depend on debt vehicles to fund operations. After all, these three biotech companies are all cash flow negative at this point in their respective life cycles.
Higher interest rates, in turn, increase the odds that cash flow-negative companies will lean on secondary offerings to make ends meet. Investors rarely like public offerings, as these funding instruments increase the number of outstanding shares, whereby diluting the holdings of current shareholders.
Keeping with this theme, Pacific Biosciences of California recently tapped the public markets for $175 million at the end of January. All three of these companies, however, have significantly raised their outstanding share count over the prior five years.
BNGO Average Diluted Shares Outstanding (Quarterly) data by YCharts
Now what
Should bargain hunters take advantage of this latest weakness in Bionano Genomics, Pacific Biosciences of California, and/or Sangamo Therapeutics? It all depends on your investing time line. But there's no denying that all three of these biotechs sport a tremendous amount of deep value.
Bionano Genomics' optical genome mapping platform could open up entirely new ways to treat human diseases. Pacific Biosciences of California thinks newer sequencing platforms like Revio and Onso will drive the company toward profitability by 2026. And Sangamo Therapeutics' early-stage genomic medicine platform has the potential to deliver a broad array of game-changing treatments across a varied landscape of high-value indications.
All told, these small-cap biotech stocks do have the potential to generate market-crushing returns. But investors may have to hold these names for an extended period of time to realize a worthwhile return on their capital.
