As semiconductors falter, bio rebounds... Will the interest rate inflection point occur in 2022?

Pharmaceutical and bio industries rebound due to easing of interest rate burden in 2022 and 2023 Large-cap bio stocks are strong amid sharp decline in semiconductors... Inflow of institutional buying power

As the domestic stock market, centered on semiconductors, is rapidly shaking, there is a growing possibility that pharmaceuticals and biotechnology will emerge as the next leading industry. While corrections have recently spread across semiconductor and related component and equipment stocks, major bio stocks have shown relatively strong trends.

In the past, when the interest rate burden was eased, bio stocks rebounded against the downward trend of the overall market. Representative examples include expectations of a decline in long-term interest rates in 2022 and an interest rate cut by the U.S. Federal Reserve (Fed) at the end of 2023. Recently, as the adjustment of semiconductors and the business performance of domestic bio companies coincide, the bio rebound at past interest rate inflection points is receiving attention again.

#### Bio rebounds from downturn in 2022… Widening expectations of interest rate cut in 2023

In 2022, the U.S. Federal Reserve aggressively raised the base interest rate to curb inflation. The base interest rate, which was 0-0.25% at the beginning of the year, increased to 4.25-4.50% at the end of the year, and all growth stocks in the domestic stock market were hit hard.

However, after mid-June of that year, as the rise in long-term government bond interest rates slowed, bio stocks rebounded. While KOSPI fell more than 6% from June 16 to July 6, Celltrion rose 22.7%, and Celltrion Healthcare and Hanmi Pharmaceutical also recorded double-digit increases at that time.

In July, strength spread to HLB, SK Biopharm, and SK Bioscience. While investment sentiment for growth stocks, which had been depressed due to a surge in interest rates, has partially recovered, growth expectations for each company, such as new drug development and vaccines, are also reflected in stock prices.

In October of the same year, major pharmaceutical and bio companies such as Yuhan Corporation, Hanmi Pharmaceutical, and Samsung BioLogics exceeded the KOSPI growth rate. Regardless of the overall market rebound, companies with performance and growth potential showed a relatively strong trend.

By the end of 2023, the upward trend in the bio industry became more pronounced. In December, when the Federal Reserve hinted at the possibility of ending tightening, the KRX300 healthcare index rose 13.34% from the 1st to the 27th. During the same period, the KRX Healthcare Index also rose 11.62%.

Investment sentiment was also supported by the technology transfer performance of domestic companies. Chong Kun Dang signed a technology transfer contract worth about $1.3 billion with Novartis in November, and at the time, LegoChem Bio signed an antibody drug conjugate (ADC) technology transfer contract worth about $1.7 billion with an affiliate of Johnson & Johnson in December.

Bio companies take a long time from research and development to commercialization of new drugs. When market interest rates fall, the present value of future profits can increase and the financing burden can be reduced. The past market has shown that easing the interest rate burden can be an opportunity to reevaluate the growth value of biotechnology companies.

#### As the focus on semiconductors falters, biotechnology rises... Signs of changes in stock prices and institutional supply and demand

There is a possibility that the rebound in bio stocks that occurred at interest rate inflection points in the past will be repeated this time as the semiconductor-centered upward trend is shaking.

In fact, in the domestic stock market from the 12th to the 16th, the stock price trends of semiconductor and large bio stocks were clearly divergent. KOSPI fell more than 14% and Samsung Electronics and SK Hynix recorded double-digit declines, while Yuhan Corporation, Celltrion, and Samsung BioLogics rose. While corrections spread not only to large semiconductor stocks but also to related materials, parts, and equipment companies, large bio stocks maintained their relative strength.

Institutional buying was also confirmed. During the same period, institutional investors net purchased Samsung BioLogics for about 170.9 billion won and Celltrion for about 147.8 billion won. Both companies were included in the top 10 stocks purchased net by institutions. As stock prices rose and weekly buying flowed in, the relative strength of performance-based large-cap bio stocks stood out.

In the U.S. stock market, trends in the semiconductor and healthcare industries were mixed last week. While the Philadelphia Semiconductor Index fell 11.4%, XLV, a healthcare industry exchange-traded fund (ETF), rose 3.45%. While concerns about artificial intelligence (AI) investment costs and profitability were putting pressure on semiconductor stocks, the healthcare industry showed a relatively strong trend.

The business performance of domestic bio companies has also become more concrete than in the past. Samsung BioLogics is pursuing earnings growth based on increased orders from contract development and manufacturing (CDMO), and Celltrion is pursuing increased sales of new biosimilars. Alteogen, ranked No. 1 in KOSDAQ market capitalization, has begun to secure commercialization profits as global sales of Keytruda SC, which uses its own platform technology, expands. Yuhan Corporation began overseas commercialization of its anti-cancer new drug, Lecraza, and HLB secured approval from the U.S. Food and Drug Administration (FDA) for its bile duct cancer new drug, Repick2, last September. RigaChem Bio is also expanding its entry into the global market through antibody drug conjugate (ADC) technology transfer.

If in the past the rebound in biotechnology was centered on a reevaluation of growth value due to the easing of interest rate burdens, this time, with the concentration of investment centered on semiconductors easing, expectations were added that new drug approvals and technology transfer achievements could lead to increased performance. It is also worth noting that this is the period in which major bio companies announce their third quarter earnings.

The easing of interest rate burden and growth expectations for each company played a role in the bio industry's rebound in 2022 and 2023. This time, as the semiconductor-centered stock market declines, institutional funds are flowing into large bio stocks, and new drug approvals and commercialization achievements are increasing, raising the possibility that pharmaceuticals and bio will become the next leading industry.