Taking notice

How biotech can maintain momentum in 2Q17

Political overhang during the first quarter kept generalists on the sidelines but provided a buying opportunity for life sciences specialists that led the sector to outperform. With “repeal and replace” in the rearview for now and other sectors cooling off, generalists are beginning to nibble at offerings in the mid-cap space where they think there may be takeouts.

“That outperformance has been pretty good,” Guggenheim Securities’ Susanne Mulligan told BioCentury. “That has caused the generalists to start paying attention again.”

A string of positive data events, an increase in M&A activity and easing of political headline risk could bring them back in greater numbers, maintaining the sector’s upward momentum.

Still, several buysiders described biotech’s outperformance of the broader markets as fragile. Most view headline risk of rhetoric around drug pricing legislation as the single biggest gating factor for a rotation back into the sector - even if specialists have become desensitized to the issue and expect a near-zero chance of action in the near term.

Most investors cited tax reform as a must-have for the equity markets, as some of the support for equities, including life sciences, is predicated on legislation passing that includes profit repatriation.

While the number of M&A transactions have been lower than expected, investors continue to expect an uptick in activity that would bring generalists back into the sector.

Investors expect a healthy follow-on market to continue in the second quarter, as the handful of opportunistic deals that got done last quarter suggest there’s plenty of demand.

And despite a weak IPO market to open the year - with the lowest total raised in a quarter since 2013 - outstanding IPOs can still get done. Bankers said a long list of high-quality companies that have filed confidentially are ready to come out, but there was no consensus on what would trigger an opening of the IPO tap.

Specialist performance

After a dismal 2016, specialist investors are leading biotech’s recovery by taking money off the sidelines to increase their stakes in companies at attractive valuations, taking advantage of a largely generalist-free environment.

“I think the sector got very oversold in the fourth quarter,” ClearBridge Investment’s Marshall Gordon told BioCentury. “A lot of the first quarter was a recovery from that.”

“That outperformance has been pretty good. That has caused the generalists to start paying attention again.”

Susanne Mulligan, Guggenheim Securities

All the biotech indices outpaced

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