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In sight of uncharted territory

How buysiders view risk of correction in 4Q18 as biotech indexes near all-time highs

Strong growth from small- and mid-caps coupled with a late run from large cap biotechs has pushed the sector within sight of its all-time high in 2015. Some buysiders now are seeing red flags of a possible correction: small- and mid-cap names that were overweight most of the year are now viewed as expensive, while a few investors are bemoaning the quality and early stage of new entrants as IPOs continue at a torrid pace.

However, the red flags aren’t serious cause for concern for most investors who talked to BioCentury -- at least not yet. Large caps remain cheap on a relative P/E basis and were the best-performing segment of biotech for the first time in six quarters. In addition, the data show there isn’t as much early stage risk in the 2018 IPO market as there was before the market peaked in mid-2015.

Moreover, while small- and mid-caps may be viewed as expensive, most specialists still see room to grow as stock pickers can find upside in select names.

“The sector has good momentum and that suggests we’re pointed in the right direction fundamentally.”

Brad Loncar, Loncar Investments

According to the buysiders, only macro risks could halt biotech’s upward momentum through year end. But the midterm elections in the U.S. are not top of mind.

“The sector has good momentum and that suggests we’re pointed in the right direction fundamentally,” Brad Loncar of Loncar Investments told BioCentury. “Anything that would jeopardize that calm could be a bad thing.”

Even if a correction comes, investors are confident that a record year of fund-raising has most biotechs well positioned to weather nearly any storm.

Testing the top

With biotech indices nearing all-time highs, some investors are starting to question whether there’s enough momentum to break through to new heights.

Companies and investors remember all too well what happened after the benchmarks peaked in July 2015 -- a 45% downturn that stretched through all of the following year.

The indexes have clawed back most of those losses. The BioCentury 100 ended 3Q18 about 9% below the July 2015 top and is up 16% this year. Similarly, the NASDAQ Biotechnology Index (NBI) finished the quarter about 8% below the July 2015 peak after having climbed 14% so far in 2018.

At least one major biotech index has already blown through its 2015 high watermark. In January, the

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