3Q Financial Markets Preview: Window watching

3Q13 Preview: Buysiders say generalist return doesn't herald end of the bull run

Buysiders think biotech is poised - and now financed - for future growth even if markets take a brief pause at some point this quarter. Generalist investors are at long last helping to fuel demand for new biotech issuances, including an expansion of the first legitimate IPO window in a decade.

On June 18, IPOs in aggregate crossed the $1 billion threshold with 19 deals sold over 4.7 months. The year to date total now stands at 25, with at least 13 companies still in the queue (see "IPO Queue," A2).

Already public companies are still able to raise money, but the follow-on market is beginning to show signs of slowing.

With 33 follow-ons totaling $4.2 billion, 2Q13 was the third biggest quarter since BioCentury started tracking industry financings in 1994 and the largest since the last quarter of 2000, at the height of the genomics bubble (see "Follow-on Performance," A7).

Backing out the $2.3 billion raised by Valeant Pharmaceuticals International Inc. to fund its acquisition of ophthalmic play Bausch + Lomb Inc. brings the total down to $1.9 billion - less than the $2.3 billion raised in 1Q13 but more than the $1.1 billion during 2Q12.

Though the tally includes several companies that are not exactly top shelf, buysiders noted discounts have been required from many and said quality companies outnumber the bad apples. Several also said the very wide range in aftermarket performance could be an indication that investors are being appropriately cautious.

Indeed, while an influx of overenthusiastic generalists frequently signals the beginning of the end, buysiders do not think their return means the sector is at the tail of the bull run. So far, they say, specialists and generalists alike are being selective, and valuations have not gotten out of hand.

And when the run inevitably does slow, buysiders expect a large proportion of companies will be sufficiently capitalized to weather a dry spell.

Fundamentally sound

The consensus among buysiders is that the biotech sector is in one of the strongest positions in recent memory, with a bolus of interesting drugs and drug candidates on or nearing the market (see "Punctuated Equilibrium," A8).

"The pace of innovation is accelerating as there were 39 new drugs approved in 2012 - which is the most in 16 years - so people are seeing new therapies for areas like cancer, obesity, diabetes, multiple sclerosis, plus new ones coming for cystic fibrosis and HCV," said Andrew Acker of Janus.

Almost every name in the large-cap group is in the midst of a new product cycle, he

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