6:14 PM
 | 
Oct 05, 2018
 |  BioCentury  |  Finance

Large cap comeback

Biotech’s large caps led the way in 3Q18 for first time in past six quarters

The biotech sector continued to be a stock pickers’ market through 3Q18 as there was a near even split between global biotech stocks that gained and lost value in the quarter.

While 1H18 saw investors overweight in small- and mid-cap names, most buysiders now view those same companies as already expensive or getting there, meaning investors have to be even more selective to find companies that still have upside.

On the flip side, large caps remain largely cheap on a P/E basis compared with pharma. While the relative value wasn’t new for the third quarter, it may partially explain why large caps were the best performing market tier group, up a median 8% for the quarter, as other market cap segments became increasingly more expensive. It was the first time in the past six quarters that large caps came out on top.

Meanwhile, financings bucked the typical summer lull. IPOs maintained their pace through 3Q18 with 24 deals raising $2.4 billion -- the largest number of deals and amount of money raised in the third quarter since 2014. Those deals included the first IPO on the Hong Kong stock exchange’s new biotech chapter -- from Ascletis Pharma Inc. -- which also happened to be the quarter’s largest IPO.

Ascletis raised HK$3.1 billion ($399.8 million) through the sale of 224.1 million shares at HK$14 per share on July 26, but the antiviral company’s after-market performance has underwhelmed. The stock finished the quarter at HK$7.74, down 45% from its opening price.

Follow-on financings had a record summer quarter with 57 deals, the highest number since BioCentury began tracking financings in 1994, and $6.8 billion raised, the second-largest amount of capital raised in a third quarter, just short of the $6.9 billion record set during the same period last year.

Again, Hong Kong paced the largest fund-raisers, with NASDAQ-listed cancer company BeiGene Ltd. raising a $902.7 billion follow-on.

Winners and losers

Across all market cap bands, global biotechs lost a median of 0.4% in market cap for the quarter. But in line with recent quarters, the winners added more value than the losers lost, leading to a net market cap gain of $125.9 billion. That accounted for 86% of the $146.2 billion that global biotechs had added to their valuations year to date.

Large caps above $10 billion were the quarter’s best performers, up a median 8% and adding $64 billion in value.

The top performer was Illumina Inc., up 31% for the quarter, adding nearly $13 billion to its market cap. On July 31, the sequencing company jumped $35.12 (12%) to $324.36 after releasing 2Q18 results that included a second consecutive increase in 2018 revenue and EPS guidance. For fiscal 2018, Illumina guided for 20% revenue growth and non-GAAP EPS of $5.35-$5.45, up from January guidance of 13-14% revenue growth and $4.50-$4.60 non-GAAP EPS.

The worst performer of the group was Chinese biotech Shanghai Fosun Pharmaceutical Group Co. Ltd., which was hammered by the markets in late August after allegations surfaced that one of the company’s research subsidiaries had falsified manufacturing records. Fosun lost 27% of its market cap over the quarter, or nearly $4.2 billion.

The second-best performing tier was companies valued from $5-$9.9 billion, which had a median gain of 1% and 15 gainers and 14 decliners.

The group’s top gainer, Ionis Pharmaceuticals Inc., had a roller-coaster quarter. The biotech began to climb in late July after partner Biogen Inc. reported $423 million in worldwide 2Q18 sales of spinal muscular atrophy therapy Spinraza nusinersen, beating consensus estimates of $388 million.

On Aug. 27, Ionis slid $8.53 (16%) to $45.17 after another of its partners, Akcea Therapeutics Inc., announced FDA issued a complete response letter for Waylivra volanesorsen to treat familial chylomicronemia syndrome. Ionis...

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