4th Quarter Stock Preview: Back from the Brink

The 38% run-up in biotech stocks since early March - combined with public biotech fundraising that has already surpassed the whole of 2008 - has investors wondering how long the magic can last. Buysiders and bankers expect that if the broader market holds, there will be continued upside as long as there are more clinical and regulatory successes.

Specialists, hedge funds and retail investors led the charge into small cap and microcap biotechs in the third quarter. Momentum investors also came into the group for the first time in at least a year, buying into the rush of follow-on offerings marketed last quarter. Generalist investors also were seen stepping back in cautious moves to restore some risk profile to their portfolios.

For large cap biotechs, healthcare reform continued to be a drag on stock prices. Still, several buysiders expect that a palatable bill could pass and prompt a relief rally once uncertainty over the exact shape of reform ends.

On the fundraising front, a spectacular July led into a typically quiet August. But biotech bankers are clearly back to work, as fundraising ramped back up in mid-September. Overnight follow-ons continued to be the modus operandi, allowing bankers to minimize or even eliminate underwriting risk and companies to leverage pre-announcement commitments to drive demand.

By the end of last quarter, public fundraising reached $13.1 billion, 56% above the $8.4 billion raised in all of 2008. Still, despite a giant spate of follow-ons in 3Q, this year's total still lags far behind the $23.8 billion raised in 2007, which is the year before the dikes broke.

Even IPOs are back on the table. The first S-1 for a development stage biotech, inflammation company Anthera Pharmaceuticals Inc., was filed in mid-September. Bankers and buysiders expect to see more filings this quarter, as bankers are already working with IPO-ready companies and buysiders have started to talk to potential debutantes. However, no one is looking for a wide-open IPO window.

Since the lows in early March, the NASDAQ Biotechnology Index (NBI) and the BioCentury 100 both have gained 38%. Last quarter, they tacked on 12% and 9%.

The

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