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.
The third quarter was a perfect storm of macro worries followed by