Biotech Just Had Its Big Reset - Here’s What Comes Next (Dan Rasmussen, D.A. Wallach & Meb Faber)
Speakers
Summary
- Biotech's Structural Reset: The sector is characterized as having the highest dispersion and lowest correlation to the broader market. The speakers discuss a "reset" where, following a massive drawdown, the sector is primed for recovery, driven by M&A and a wash-out of "tourist" capital.
- Factor Investing in Biotech: Traditional factors (Value, Quality, Momentum) fail in biotech. New factors are proposed: Value = Market Cap/Spend (lower is better); Quality = Specialist Ownership (>50% portfolio allocation); Momentum = Peer/Clinical Trial similarity rather than price momentum.
- The China Pivot: A significant shift is noted where Big Pharma is now sourcing 30-40% of early-stage assets from China (up from single digits), driven by massive government infrastructure investment and lower clinical trial costs.
- Japan's Corporate Governance: Japan is highlighted as a high-conviction trade due to massive cash hoards (median company holds 7 years of net income in assets) and a cultural shift toward shareholder returns (buybacks/dividends).
- Macro & Deficits: A "conspiratorial macro" view suggests that persistent US deficits are directly fueling corporate profit margins, creating a floor for US equity valuations despite high CAPE ratios.
Trade Ideas
D.A. Wallach
Partner at Time BioVentures
Big Pharma is increasingly buying early-stage assets from China (30-40% of acquisitions vs. single digits previously). Clinical trials in China are significantly cheaper and faster. China has successfully built a biotech infrastructure that is now integrating into the global supply chain. As US/EU firms outsource early development to China for speed/cost, Chinese biotech firms become prime M&A targets or dominant players in early-stage discovery. LONG. This is a contrarian play on Chinese innovation capabilities rather than just consumer demand. Geopolitical tensions; regulatory changes regarding data acceptance (though currently improving); US restrictions on Chinese biotech.
Dan Rasmussen
Founder and Portfolio Manager at Verdad Capital
Biotech is the most uncorrelated sector with the highest dispersion. 70% of unprofitable biotechs lose money, but the sector has experienced a massive drawdown (historically followed by massive recoveries). The "baby has been thrown out with the bathwater." A systematic approach filtering for "Quality" (owned by specialists) and "Value" (low Market Cap relative to R&D Spend) identifies winners in a sector where generalist capital has fled. LONG. The sector offers "lottery ticket" positive skewness after a deep cyclical bottom. High failure rate of individual clinical trials; interest rate sensitivity for unprofitable companies.
Dan Rasmussen
Founder and Portfolio Manager at Verdad Capital
The median Japanese company holds ~7 years of net income in assets (vs. 1 year for US companies). Corporate governance reforms are pressuring these companies to increase payouts (dividends/buybacks). There is a massive "value unlock" potential as these unproductive assets are distributed to shareholders. The return of inflation signals nominal GDP growth, breaking the deflationary mindset. LONG. It is a deep value play with a specific catalyst (governance reform) that does not rely on massive tech innovation. Cultural resistance to rapid change (slow-moving consensus); currency volatility (Yen weakness).
Dan Rasmussen
Founder and Portfolio Manager at Verdad Capital
US valuations are high, but the US is undergoing a "unique in history innovation wave" (Cloud, AI). Unlike other markets, US companies have actually grown into their high multiples through tangible technological revolutions. Betting against US innovation has historically been a losing trade. LONG. High valuations are a feature of high innovation, not necessarily a bubble. Mean reversion in profit margins; regulatory crackdowns on Big Tech.
D.A. Wallach
Partner at Time BioVentures
Global balance sheets have expanded 5x over 60 years, largely driven by asset price inflation and corporate profits. Corporate profits are being structurally supported by government deficits (Govt borrows -> pays entitlements -> recipients spend at Corps). This cycle supports real assets and equities over cash. LONG. Real assets and equities are the hedge against the "deficit-profit" loop. Fiscal austerity (unlikely); major recession curbing consumer spending.
Up Next
This Meb Faber Show video, published February 06, 2026, features D.A. Wallach, Dan Rasmussen discussing CHNA, KURE, XBI, IBB, EWJ, DXJ, DFJ, QQQ, SPY, USO, XLE. 5 trade ideas extracted by AI with direction and confidence scoring.
Speakers: D.A. Wallach, Dan Rasmussen · Tickers: CHNA, KURE, XBI, IBB, EWJ, DXJ, DFJ, QQQ, SPY, USO, XLE