Ground up

How biotech stocks may navigate post-Brexit, pre-election waters

As the third quarter gets under way, biotech is shaking off the hangover of the Brexit vote while facing the overhang of the November election in the U.S. Fifteen bankers and investors contacted by BioCentury agree neither macro event will affect biotech's still-solid underlying science, but nevertheless are going to have effects on the sector's access to the capital markets.

While worries that Brexit would wreak havoc on global markets did not pan out in the first week of the third quarter, the investor expectation of important new modalities driving the sector next year also might need to be tempered. The reason is the new questions surrounding chimeric antigen receptor (CAR) T cell therapies that arose after Juno Therapeutics Inc. disclosed a clinical hold on a Phase II trial of its lead cancer product due to two patient deaths.

In any case, risk appetite among generalists is at best diminished and at worst non-existent. Compounding the problem is a loss of big cap biotech leadership and a less than robust list of companies with key 3Q16 milestones.

Against this backdrop, some biotech specialists are rebuilding from the ground up - selectively picking small- and mid-cap names. The first step is adding to positions in existing portfolio companies deemed excessively punished during the first half. A harder ask is putting money to work in new names.

In all cases, companies looking to court bargain hunters should be prepared to offer financing terms that are much sweeter than before. Gone are the days where investors took a basket approach and bought as many follow-ons or IPOs as possible.

Bankers are telling their companies to avoid publicly marketed deals at all costs, as many of the companies that tapped the markets in that manner were soundly beaten down in the second quarter. Instead, the advice is to be ready to finance at a moment's notice. At least one banker thinks this could require careful navigation of the summer holiday and the narrow window this fall before the U.S. election completely takes over the conversation.

Pounded, briefly

The June 23 Brexit vote hit biotech hard, but the effects were short-lived. After a two-day hosing following the vote, biotech was testing its February nadir and the sector's small gains on the quarter had been erased. But both biotech and the broader markets ended the second quarter on an upswing.

The fact that biotech is gradually recovering

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