Fundamental reset

How biotech companies, bankers and buysiders will adjust to a new base in 2Q16

After three months of carnage, buysiders acknowledge their conservative prediction of biotech keeping pace with the broader markets is unlikely to occur this year. Instead, investors are looking for the few individual winners likely to have breakout years even if biotech faces election headwinds in the U.S.

The task should not prove impossible, as the consensus is biotech is at or near the floor. With the sector's fundamentals unchanged, and working off of a new baseline, buysiders and bankers agree it is a good time to put money to work.

"The public markets have repriced the value of the science," said Edwin Gordon of Ladenburg Thalmann. "Specialists always pray for a stock picker's market, and what we've got is a stock picker's market."

The way companies access capital in the coming months is likely to be markedly different from the not-so-distant past. The expectation is for an increase in overnight deals or non-equity raises.

No one is counting on a near-term M&A bailout, as the consensus is the valuation gap between buyers and sellers is still too wide. In addition, despite lackluster financing in the first quarter, the majority of biotechs remain loaded with cash and are in no hurry to be bought.

The dearth of takeouts could start to change in the second half as companies' memories of their high stock prices in 2015 fade in the rearview mirror.

Forgettable

The first quarter was biotech's worst in nearly 14 years, as the BioCentury 100 index fell 26%. None of the market cap bands were spared, with all of the tiers falling at least 12% (see "Results by Market Cap," page 12).

Biotechs on the other side of the Atlantic fared better. The BioCentury London index shed 7%, and the BioCentury Europe index lost 11% (see "London vs. Europe," page 13).

Biotechs in the U.K. and on the Continent have been shielded from the worst of the downside, but partly because they never fully participated in the updraft of the prior six years.

The broader markets started this year deep in the red but reversed course in mid-February. For the quarter, the Dow Jones Industrial Average posted a 1% gain and the NASDAQ Composite slipped

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