Smitten by SMID-caps

Why biotech buysiders are still bullish on small- and mid-caps

Risk is pervasive heading into the third quarter and choppy waters are expected, but 13 buysiders told BioCentury they’re not afraid to stay the course.

A politically charged environment is likely to intensify as the midterm elections approach in the U.S., and investors fully expect rhetoric around drug pricing to amplify as well.

Juxtaposed against this are persistent macroeconomic fears of a trade war, rising interest rates and increasingly chaotic geopolitics, which are expected to feed a new wave of market volatility.

An unusually light catalyst calendar means biotech sector indexes could see limited upside support as well (see “Eyes on Launches”).

Despite this, buysiders aren’t going to play defense. Instead, they are sticking with the thesis that has served them well thus far in 2018: overweight small- and mid-caps and steer clear of the big caps.

A minority believe the large caps could close the performance gap starting in the back half of the year, but the argument is technical, not fundamental.

But that doesn’t change the view that small- and mid-caps are going to continue to create value through clinical, regulatory and commercial execution.

This market bifurcation should keep biotech indexes weighed down by the big caps, benefiting stock pickers by allowing them to generate “alpha” by topping their benchmarks.

Bolstering the small- and mid-cap thesis is a continued belief by investors that M&A will pick up in the second half.

Buysiders were perplexed by the lack of deal flow in 2Q18 -- especially after robust takeout activity to start the year

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