Darwin's delight

2013 biotech stocks: Healthy balance sheets to support small cap tier-jumpers

The biotech ecosystem looks healthy moving into 2013. With the space above $1 billion more than replenished in 2012, mid-cap names have money to create their own tier-jumping stories this year, while investors see natural selection plucking winners from the small and micro-cap spaces.

Fund managers suggest the run-up in large caps could lead to a rotation of investment into lower market cap tiers, fueling the cycle of replenishment necessitated by take-outs like Amylin Pharmaceuticals Inc. and Human Genome Sciences Inc.

Of the 85 companies that began last year in the $200-$499 million market cap tier, more than half had at least three years of cash at the end of 3Q12. By the start of 2013, 25 had jumped one or more tiers.

This year, 80 companies are starting out in this small cap space; 44 have development programs in key areas of buysider interest, while only 14 are operating in no-fly zones shunned by public investors (see BioCentury, Jan. 7).

Buysiders also expect to see larger sums of money targeted at a few small and micro-cap names. This would continue a pattern that emerged in 2012, when specialists provided funds needed to get well beyond important inflection points to a select list of companies while subjecting others to Darwinian forces.

As for the IPO market, the reemergence of crossover investors, a strong performance in the after-market by last year's class of new public entrants, and implementation of the JOBS Act could help improve prospects for private biotechs looking for a public exit in 2013.

Biotech's big run

Biotech had an impressive run in 2012. Despite a sector-wide slowdown in 4Q12, on the year the NASDAQ Biotechnology Index gained 32% and the BioCentury 100 gained 26%, handily outperforming both the NASDAQ Composite (up 16%) and S&P 500 (up 13%).

Much of this performance was driven by companies valued above $5 billion, which as a group have been the best-performing market cap tier for two quarters running. In fact, the big caps were the only biotech tier to finish last quarter in the black (see "Raised by Market Cap").

Ladenburg Thalmann's Edwin Gordon suggested last quarter's selloff was motivated by uncertainty about how capital gains would be taxed as politicians dealt with the fiscal cliff.

"There was a decided preference for selling winners rather than getting out of losers last quarter, indicating fear about capital gains was driving much of the selloff," he said. "That means there is a lot of cash on the sidelines, setting us up for lots of activity in the first quarter."

The standout performers last year were bellwether Gilead Sciences Inc. and rising star Regeneron Pharmaceuticals Inc.

Last year, Gilead tacked on $23.5 billion in valuation, a 76% increase, thanks to continued clinical success with its HCV portfolio. The company

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