Some like it hot

2Q12 biotech stocks: Rally may last a bit longer despite signs of a top

Despite signs the biotech rally is getting "toppy," market watchers ranging from buysiders to bankers to technical analysts think it can continue into this quarter. They say the market still has momentum and investors still have an appetite for risk.

Buysiders expect micro- and small caps could benefit the most, as many think valuations for large- and mid-cap biotechs have peaked.

One signal these valuations may have topped out is that biotech indices were largely flat or down since early February, although they did show a bit of resurgence in the final weeks of March.

The tech-heavy NASDAQ rose 19% last quarter, outperforming the BioCentury 100, which rose 17%, and the NASDAQ Biotechnology Index (NBI), which gained 18%. The S&P 500 and Dow Jones indices gained 12% and 8%, respectively.

Healthcare fund in-flows were strongest in January, when the stock performance was the best. In February and March, fund flows were in negative territory. IT fund flows performed better in the last two months of the quarter, as did the NASDAQ index (see "Healthcare/Biotech Fund Flows," A2).

Another indicator of a potential top is that the gains in biotech were broad-based, with at least two gainers for every decliner across every market cap segment (see "Results by Market Cap," A3).

Indeed, most of the market cap segments rose by double digits last quarter, with small caps worth $200-$499 million adding the most.

Even then, there may be more room up for smaller caps, given the sharp declines the group endured in 2H11. At the end of last quarter, 38% of small cap and 86% of U.S.-listed micro-cap biotechs remained more than 25% below their intra-day 52-week highs (see "The Upside of Micro-Caps," A8).

The gains in this rally - and its length - are already near the top of what is typical for the sector.The NBI has added 46% in about eight months, while the BioCentury 100 is up 37%.

In the past decade, the only rally with comparable performance was the prior one, which ran from July 2010 to July 2011 and saw an increase of 46% for the NBI and 50% for the BC100 (see "Inflection Point," A4).

Not surprisingly, a financing boom has accompanied the rally. In fact, the 34 biotech follow-ons last quarter was an all-time record. The financings averaged $60.2 million each and totaled $2 billion.

The last time more money from follow-ons was raised was in 4Q09, when $2.4 billion was raised in 26 deals averaging $93.1 million. But the total was $1 billion and the average size was $44.1 million when three outliers are excluded - $501 million raised by Vertex Pharmaceuticals Inc.; $477 million by Human Genome Sciences Inc.; and $427 million by Dendreon Corp.

Moreover, small- and micro-cap biotechs reversed the trend of recent years by raising more than their mid-caps brethren in 1Q12(see "Raised by Market Cap," A3).

In all, 104

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