12:00 AM
Mar 05, 2007
 |  BioCentury  |  Finance

Ebb & Flow

The BioCentury 100 dropped 3.5% last Tuesday, and finished the week off 7%, as equity markets worldwide reacted to the blow off in the Chinese market and jitters about the strength of the U.S. economy. But specialist buysiders took the drop in stride, largely, they said, because biotech stocks fell in tandem with the overall markets and the fundamentals of the sector are seen to be solidly in place.

On the day after the drop, Evan McCulloch of Franklin Templeton said, "we were totally unfazed by what happened yesterday." He drew comfort in the fact that "it was across the sector and across all sectors."

Others also noted that biotech wasn't at the forefront of the action on the first day of the sell-off. "With the drop-off, it went down in line and there was a relatively modest sell-off," said Sven Borho of OrbiMed. "Typically biotech leads on the downside because it's very volatile, but it didn't on Tuesday."

Although the group continued to fall past the general market indicators by week's end, several buysiders noted that there was little if any sector rotation in or out of biotech. "There has been a lot of de-risking of biotech funds, but no wholesale selling of biotech in favor of pharma or anything like that," said MPM Capital's Kurt von Emster. It's more a "larger resting period, like in 2002, rather than a biotech-specific decline."

He added that most major institutions are holding their ground: "Mom and pops are selling, but not institutional investors."

Indeed, if slowing economic and earnings growth for the economy as a whole are around the corner, biotechnology may do well.

"When S&P earnings growth is slowing, typically for healthcare that's a pretty good environment," said Oliver Marti of CCI Healthcare Partners. He cited Morgan Stanley research showing healthcare companies with the strongest sector performance during periods of decelerating earnings. "It favors medtech and biotech as well."

Another support beam for the biotech sector is that investor enthusiasm for biotech acquisitions is likely to continue unfettered and could bolster some small and mid-cap names.

"We have bent our portfolio to companies that have the option of being acquired," said von Emster. "There are so many acquirers out there that have been sitting in the wings waiting for a drop to lower M&A valuations."

He added: "This is not going to have much of an effect on M&A premiums - premiums are still there in the 40% plus range. But in a declining market an acquirer might be more inclined to jump on that sooner rather than later."

Buysiders are hoping that, given the lack of momentum in the sector for the last several years, biotech has nowhere to go but up. But no one expects much upside until the news flow ramps up leading into the the American Society of Clinical Oncology (ASCO) meeting at the beginning of June.

"Biotechs had a pretty modest performance last year, so they're pretty modestly priced," said Borho. "I would guess biotech is going to be one of the best performing sectors in the Nasdaq for the year."

But in the short term with continued volatility, anything goes. "Market...

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