12:00 AM
Oct 05, 2015
 |  BioCentury  |  Finance

Volatile, not futile

Biotech turned red in 3Q15 but bankers, buysiders say it's the lone growth sector

Bankers and buysiders are not ready to call the end of the biotech bull on the heels of the sector's worst quarter in more than 13 years. But they do expect volatility to persist through late next year because drug pricing is on the radar of generalist investors and the public, and likely will remain an issue through next year's presidential election in the U.S.

Even so, many buysiders and VCs think companies developing novel drugs will be insulated from any long-term effect, and that pricing will be factored into valuations only during sporadic bursts.

During this period of volatility, some buysiders are adding new positions or reinforcing their favorite downtrodden names, while others are sitting on their hands and awaiting calmer waters. The upshot is that for the first time since at least the start of 2014, investors are not repeating in unison the mantra that any dips in biotech indices are an excuse for a shopping spree.

The major biotech indices are down more than 20% from their July peaks. Even though the percent decline fits the definition of a bear market, buysiders are not willing to put that label on the sector until they see which direction biotech heads in the coming months.

A prolonged period of caution on the part of some buysiders could translate into continued downward pressure on valuations and diminish the ability of companies to access capital.

Some of the pressure could be abated by generalist investors who continue to own stock in the space. In fact, one reason bankers think the equity markets will remain open for biotech companies looking to go public is that generalists have nowhere else to go if they want growth.

Paul Yook of LifeSci Capital summed up the sentiment: "If you want growth, you're not going to find it in the broader market."

The other reason bankers think the IPO window remains open is that the 3Q15 performance of IPOs has been better than biotech as a whole (see "IPO Performance," page 7).

Guggenheim Partners' Stuart Duty told BioCentury, "We're not seeing institutional investors tell us anything other than 'we still want to see transactions.'"

However, some of the investors told BioCentury they don't.

In this environment, private companies looking to go public will need to ramp up meetings with crossover and public investors to build a support base. Public companies seeking fuel will need to come to grips with the fact that their valuations are unlikely to return to July peaks in the foreseeable future.

Stormy weather

The third quarter was a perfect storm of macro worries followed by sector-specific concerns, and the results were not pretty, particularly for U.S.-listed companies. The BioCentury 100 index plunged 23% in 3Q15, its worst quarterly move since a 30% hosing in 2Q02, when the overall equity markets were in bear territory and any remaining gains from the biotech bubble were being washed away.

For 2015, the BioCentury 100 is now down 3%. The broader markets also are in the red. The Dow Jones is down about 9% this year, while the NASDAQ is off 2%.

London and Europe were insulated from the sell-off. The BioCentury London index was flat last quarter and for the year is up 6%. The BioCentury Europe index slipped 1% in 3Q15 but is up 18% for the year, driven by big-cap names including UCB Group and Ipsen Group (see "London vs. Europe," page 15).

"The dynamic may be slightly different in Europe," noted Paul Tomasic of RBC Capital Markets. He said the steady hands of specialist investors are helping biotech stocks on the Continent move, at worst, horizontally. "Cross-border investments can be hard for generalists," he noted.

"There are less generalist funds in Europe who might have been influenced by the current debate on drug pricing," added Omega Funds' Otello Stampacchia.

He also said central banks could be playing a role. "Europe is in full blown quantitative easing mode still, while the U.S. is supposedly about to exit it. So perhaps some of the retail and institutional liquidity is finally finding its way to smaller cap opportunities in Europe," he said.

Elsewhere, macro issues took center stage in August, when worries about devalued currency and slowed industrial activity in China sent global markets into turmoil. That month, the Shanghai Stock Exchange Composite shed 12%. It has not since recovered and is down 6% through the first nine months of the year.

China's woes caused downward pressure in the U.S., where the general equity markets shed 6% in August.

The bigger blow to biotech came as 3Q15 was drawing to a close, as Turing Pharmaceuticals AG provided the kindling for a political firestorm about drug prices.

Hillary Clinton wasted no time in seizing an opportunity to call for legislation addressing drug prices. The presidential candidate tweeted about price gouging on Sept. 21 and sent the BioCentury 100 down 14% the week ended Sept. 25.

This is the sixth correction of at least 10% since the start of the biotech bull in 2009. Each of the first five lasted...

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