Tiers, some fears

Buysiders expect biotech mid-caps to find favor with generalists in 3Q15

3Q15 Financial Markets Preview

With biotech more than six years into a bull run, most of the sector's bankers and buysiders remain comfortable in uncharted waters because generalists are not jumping ship en masse in search of different industries or asset classes. Instead, the specialists expect the generalist crowd will continue to move down into the next market cap tier of biotechs.

This search for performance has one camp of dedicated investors worried that it's going to be hard to justify buying some of the names they like in the $1-$4.9 billion space at current prices. Other specialists, however, cite multiple reasons for why biotech still has plenty of room to run, including the solid financial metrics and upcoming milestones for big caps.

The latter group also contends that industry's underlying science is light years ahead of where it was just a few years ago, and that the eye-popping premiums strategic investors are willing to pay for innovation - especially in the mid-cap space - mean many companies remain undervalued.

They also think good names are being passed over because they are no longer new and shiny, and thus are taking another look at companies that went public in 2013 or early 2014 and are focused on novel areas of biology or novel therapeutic modalities (see "Big News," page 9).

"Some people have the attitude that we're in a bubble and are almost accepting of imminent disaster," said Andrew Bogan of Bogan Associates. "Then there are the folks who are still making money and think biotech is the best thing to invest in. I don't think either of those cases is well thought out. There are definitely assets that are clearly overpriced compared to historical trends. But biotechs with cash flows and profits are not unreasonable at all."

Regardless, some bankers are urging companies to get any IPO or follow-on financings done before the end of July. Their rationale is August will be slow and waiting any longer puts companies in a queue that could be jeopardized if the first few deals of September set a negative tone.

Pause then applause

The predicted 2Q15 sell-off arrived on schedule, as biotech indices shed 9% at the end of April. At the time, the consensus among biotech buysiders was some generalists were taking profits.

But the downturn only lasted four days and reversed course when Gilead Sciences Inc. blew the

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