Good riddance

Why investors think 2017 will be an up year for biotech despite macro uncertainty

 

Investors aren’t lamenting the end of 2016, but they are pinned between anxiety and optimism for the year ahead.

The anxiety stems from uncertainty about U.S. government policies for healthcare under the new administration. The continued issuance of sound bites by President-elect Donald Trump practically ensures that drug pricing will remain a significant overhang for the sector, at least until a policy stance is announced.

“The market is characterized by more uncertainty because I don’t think people really know where Trump stands on issues,” Venrock’s Bong Koh told BioCentury. “We just have an absence of information.”

There is also anxiety about competition for generalist capital from other sectors, such as financial services and infrastructure, that has resulted in a rotation out of biotech.

Yet half of the 20 buysiders and bankers who spoke to BioCentury also expressed optimism that Trump could adopt policies that are positive for the sector.

In particular, they think the repatriation of overseas cash for U.S. companies - along with rising interest rates and pricing pressures on established products - could accelerate what is already expected to be a major theme for 2017: a high level of M&A activity.

A few big deals could attract generalists back to biotech. But the potential for repatriation to drive a wave of M&A isn’t the only reason to expect the sector to do better in 2017, according to the buysiders and bankers. They also thought the discount on biotech compared to the broader markets could draw generalist money back in.

Entering the new year, biotech is cheap, while the science remains strong. Nearly all the buysiders said valuations were attractive across all market cap tiers.

And nearly all the buysiders expect 2017 to be better than last year, although expectations ranged from an up market that continues to underperform the broader markets to the potential for 20% or more upside.

Buysiders and bankers also expect the financing environment for biotech to be healthy in the New Year, meaning good quality companies shouldn’t have a problem raising follow-on capital at a reasonable price.

Expectations are similar for IPOs, where the focus will be on late-stage companies with strong insider participation.

“The market is characterized by more uncertainty because I don’t think people really know where Trump stands on issues.”

Bong Koh, Venrock

 

Biotech’s bad year

Good riddance, 2016, was the most common remark from the buysiders and bankers contacted by BioCentury. From clinical blowups to a low number of drug approvals, political uncertainty and terrible share performance, 2016 was a bad year for biotech.

“Everybody is happy to see this year end, and turn the page,” Omega Funds’ Otello Stampacchia told BioCentury.

The NASDAQ Biotechnology Index (NBI) had its worst year since 2002. In 2016, the NBI lost 22%, much worse than the 2008 financial crisis that saw the index fall 13%. Similarly, the NYSE Arca Biotechnology Index (BTK) and BioCentury 100 index were down 19% and 23%, respectively.

The pain was felt across the board as each market cap tier lost at least 8%. The hardest hit were small cap and microcap biotechs, which each fell 25% in 2016.

The year

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