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Curbed enthusiasm

Why tempered investor enthusiasm doesn't mean the biotech bull is over

Following three years of investor exuberance manifested in gains of at least 115% in biotech indices, buysiders say a good 2016 would see biotech merely keeping pace with the broader markets.

Nobody is calling an end to the biotech bull market, but volatility is the key word due to election year politics that will feature drug pricing as a central talking point, the sour performance of biotechs that tapped the markets in 2015, and an exodus of crossover investors that helped about 20 companies go public.

The consensus remains that biotech is still the best and perhaps only growth sector. As a result, many generalists will invest in biotech almost by default, even though momentum players - and their froth - are absent.

Expectations are for the generalists to remain in large cap biotech names until specialist investors show convincing wins in smaller cap companies. Specialists will have ample opportunities to build positions early in the year, as a glut of paper will be on offer in January.

The full year is likely to see fewer financings, in part because 908 companies stuffed their coffers with $109.7 billion in 2015, making it the biggest year in the sector's history.

Another reason is that bankers don't think many financings will happen from August to year end, when the election will become a distraction. Face time with buysiders will therefore be hard to come by, and companies will need to heed bankers' advice to cast as broad a net as possible when courting investors.

Even if stump speeches about drug pricing lead to periods of volatility and an associated chilling of generalist interest, specialist investors still have no concerns about the pricing power of companies with innovative medicines that deliver measurable benefits to patients.

Big ending

Biotech beat the broader markets in 4Q15 and FY15, but not by as wide a margin as last year.

The NASDAQ Biotechnology Index (NBI) was up 12%, the NYSE Arca Biotechnology Index (BTK) gained 11% and the BioCentury 100 index advanced 8% in 4Q15. The NASDAQ Composite added 8% and the Dow Jones Industrial Average advanced 7% in 4Q15.

For the year, the NBI and BTK were up 11% and the BioCentury 100 was up 5%. The NASDAQ gained 6% and the DJIA finished in the red with a 2% decline.

In 2014 the BioCentury 100 advanced 28%, the NASDAQ added 13% and the DJIA brought up the rear with a gain of 8%.

Biotech's 2015 performance was on pace to match 2014 until the sector lost 23% in 3Q15. Afterwards, investors put their money into big cap biotechs, which posted a 16% gain in 4Q15 (see "Results by Market Cap," page 10).

In Europe, the preference for big names propelled the market cap-weighted BioCentury Europe

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