2Q15 Financial Markets Preview
Following three consecutive years of spectacular returns and a solid first quarter, bankers and buysiders remain confident that large caps will continue to deliver on sales and smaller companies will continue to be rewarded for clinical success. But in the midst of a rally that has the longest legs the sector has seen, some specialist investors wouldn't be surprised if a temporary correction is on the horizon.
The last classic rotation out of biotech was in 2008. Indeed, the 13 investors and bankers who spoke with BioCentury can't recall a longer period without a rotation.
That said, they didn't think the sell-off at the end of 1Q15 signaled the end of the rally. In the last full week of the quarter, the BioCentury 100 Index dropped 6% and the NYSE Arca Biotechnology Index (BTK) dropped 5%, driven by ETF outflows and exacerbated by end-of-quarter profit-taking.
"This is almost perfect the way it is now," said LSP's Joep Muijrers. "You can raise capital very easily unless you're a bad company, and share prices are going up all the time - and it has been this way for a while."
He added: "It is human nature to be a little bit worried because at some point this will end. It is just extremely difficult to predict when that will be."
Investors cited an extended run of clinical and regulatory success, strong product launches and high M&A premiums as justification for current valuations and the basis for thinking there is more room for the rally to run. Other buysiders noted expectations that interest rates will remain low, combined with a lack of growth elsewhere in the economy, mean that generalist money is unlikely to flee the sector anytime soon.
If and when a correction does come, the group thinks it will be temporary and will merely set a new base for continued growth. Some are setting some cash aside in hopes of bargain shopping if a correction does occur.
The record pace of follow-ons is unlikely to continue, as the first quarter saw biotechs raise a record $11.3 billion. But investors see the markets remaining receptive to financings in 2Q15 with the potential for IPOs to gather pace.
The first quarter saw biotech extending its bull run, with the BioCentury 100 up 19%,