Generalists needed

Why new money will be needed to continue biotech’s rally in 3Q17

Following a nearly two-year political overhang on the biotech sector, buysiders believe sentiment once again may be turning positive and starting to catch up with the industry’s positive fundamentals.

As evidence, they point to the continued momentum of biotech indices in the second quarter, which was aided by the perception that drug pricing scrutiny from Washington is easing, coupled with a string of positive clinical catalysts.

But to maintain the momentum, the consensus view from 17 buysiders and bankers who spoke to BioCentury is that an influx of new money from generalist and growth-oriented investors will be needed to drive biotech equities meaningfully higher from current levels.

Indeed, specialists polled by BioCentury have little dry powder and would have to exit positions to free up cash for new investments.

A big step toward attracting new cash came in the form of President Donald Trump’s draft executive order on drug pricing.

On June 13, BioCentury first reported that a draft executive order on drug pricing was being written and subsequently obtained a copy of the completed version. The order contains a grab bag of policy pronouncements and proposed administrative actions, none of which are as threatening to industry as many investors had feared. Some buysiders even suggested this was a de-risking event that would nudge generalists back into the biotech space.

Another possible buoy is the fact that biotech valuations look relatively cheap given the sector’s growth profile, especially as the broader market indices continue to reach all-time highs. With technology stock valuations looking stretched and few other growth segments to choose from, some specialists believe money could start rotating back into biotech.

The third quarter also offers a bevy of clinical and regulatory catalysts. While buysiders don’t believe any single event will put biotech back in vogue, key news events in the immuno-oncology space and hemophilia could capture the attention of a wider investor base (see “A Clinical Quarter”).

“I think that for biotech to be good, you don’t need inflows. But for biotech to be great, you definitely need inflows from generalists.”

Brad Loncar, Loncar Fund

Fundamentals will continue to drive the health of the sector, but specialists noted an uptick in M&A also would help lure generalists. M&A news ground to a halt in 2Q17; nevertheless, buysiders believe anemic growth rates and barren pipelines at several big pharmas and large biotechs eventually will lead to an increase in dealmaking.

At minimum, the second-quarter payout of $30 billion to shareholders of Actelion Ltd. by Johnson & Johnson in that blockbuster takeout freed up a huge bolus of funds that may have been recycled back into biotech during the June run-up.

Bankers believe the IPO market has reached a healthy equilibrium, where new, high-quality paper is being judiciously consumed by investors, and expect more of the same in 3Q.

Until a burst of activity in the last week of June -- five deals priced raising $253 million -- the total number of debuts had been lighter than

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