By Lewis Krauskopf

NEW YORK, (Reuters) – If the U.S. sector is to be part of the stock market after the slow rise this year on Wall Street, it will need some deal-making and exciting results from clinical trials.

Stocks could be boosted by more certainty regarding the future direction of prescription drug regulations, as well as the prospect for harsher pricing legislation.

An index of biotech companies is up 2% so far in 2021, while the overall S&P 500 has gained more than 18%. A closely watched ETF that better measures small and mid-cap biotech companies — the SPDR S&P Biotech (NYSE:) ETF — is down nearly 10% for the year, and 27% from its high reached in February.

Steven DeSanctis (NYSE:) strategist, Jefferies has reported that approximately $2.5 Billion have been withdrawn from healthcare ETFs net since Aug. 31. That’s about 3% or approximately $2.5 trillion in total assets. According to Refinitiv Lipper data, the SPDR ETF in biotech saw the largest weekly outflow since records began.

Following a particularly strong 2020 for biotech stocks of smaller size, investors predicted that this group would slow down. According to market watchers, biotech shares were lost in large investment themes this past year.

These experts cited the tug-of-war among stocks which are likely to rise in an improving economy such as banks and energy. They also referred to big tech shares and growth shares that have strengthened during times of economic instability.

“It seems like healthcare, and biotech specifically, is sort of in no man’s land on a year-to-date basis,” DeSanctis said. “The swings in the market have either been, I want to own cyclicals and or I want to be defensive.”

Amgen (NASDAQ) is a large biotech stock that has dropped 10% since 2021. Vertex Pharmaceuticals (NASDAQ), however, is up 23%.

The S&P 500 biotech index trades at price-to-earnings ratio of 10.2 times forward earnings estimates, a 50% discount to the S&P 500’s P/E ratio of 20.4, according to Refinitiv Datastream data.

“When you look at the large caps, the growth opportunities and the prospects there are a lot more in question than they have been historically,” said Marshall Gordon, senior healthcare analyst at Clearbridge Investments.

Smaller companies are often targeted by investors who seek to increase their biotech valuations through acquisitions. Jefferies analyst Jefferys estimates that healthcare companies hold cash in excess of $500 billion.

“If we start to see more M&A, that should help trigger more positive sentiment around the space,” said Sahak Manuelian, head of equity trading at Wedbush Securities.

However, this year has not been a bad one for biotech stocks. COVID-19, the vaccine maker shares. Moderna BioNTech (NASDAQ:) has seen a more than 2000% increase in sales so far for 2021.

Recent industry setbacks may be affecting sentiment. Biogen’s controversial Alzheimer’s therapy has been delayed, Apellis Pharmaceutical shares fell following the release of disappointing data about its eye drug and U.S regulators put a halt to Allogene Therapeutics’ (NASDAQ:).

Manuelian indicated that data coming out of major medical conferences could boost interest in biotech in the months ahead, with a particular focus on December’s hematology conference.

There are still regulatory obstacles. Geoffrey Porges, an analyst at SVB Leerink, stated in a note this Week that it was difficult to see a large rally in biopharma due to “the persistent overhang of drugs pricing regulation risks which we believe will last until the end”

Investors said uncertainty about the Food and Drug Administration (the industry’s primary regulator) could also cloud the investment environment. President Biden has not yet nominated a permanent Commissioner.

Gordon stated that there have been “a lot of regulatory decisions which have been unexpected.” There are worries that FDA may become more complex or less predictable.