6:39 PM
 | 
Jun 28, 2019
 |  BioCentury  |  Finance

Specialists and strong fundamentals must carry the sector in 3Q19

With generalists out and little exciting news, specialists still in the game are betting on strong fundamentals

Heading into the third quarter, specialist biotech investors are in the driver’s seat, and their stances on whether to trim or spend in the down market are split.

After recovering at the start of the year from the correction territory of 4Q18, the biotech sector took a nose dive in 2Q.

Buysiders who spoke to BioCentury said the sector is lacking the standout programs that can draw in generalists, as in the early days of immuno-oncology. They also cited ho-hum clinical data, large caps failing to refill their pipelines, a slate of macro worries, and the fizzling out of the M&A spree that kicked off the year.

Nevertheless, they noted, fundamentals remain strong across the sector.

“It does feel like sentiment is worse than fundamentals,” said AXA Framlington’s Linden Thomson.

The upshot is that while some of the specialists are trimming positions and waiting out the downturn, others see an opportunity to take advantage of the fears of their peers and add to names they already like at reasonable prices.

The latter camp has been able to put in enough money to keep IPOs and follow-ons going at a steady clip.

“It is these sorts of times you should invest in the sector, when it is out of favor,” International Biotechnology Trust’s Ailsa Craig told BioCentury.

“It does feel like sentiment is worse than fundamentals.”

Linden Thomson, AXA Framlington

The top IPO performers of the quarter show demand persists in hot areas like cancer and rare diseases.

Whether cutting back or doubling down, all the investors agreed it would take a buying spree amongst large caps to change their view of those names in the near term.

They also agreed M&A probably is the only recourse for luring larger amounts of capital back to the sector in the near term.

“A big takeover is the number one thing that non-biotech investors notice in the stock market, and money pours into our sector,” Loncar Fund’s Brad Loncar told BioCentury.

The investors would like to see more deals like Pfizer Inc.’s $11.4 billion acquisition of Array BioPharma Inc. The proposed $63 billion takeout of Allergan plc by AbbVie Inc. announced on June 25 is not the right type of deal, they said, because it was driven by the revenues of Allergan’s marketed products.

“We need to see innovation-driven deals to get interest back into biotech,” Craig said.

Some also see a glimmer of hope in the Fed’s recent dovish pivot, which could reduce the broader “risk-off” sentiment and help bring biotech back into favor.

Funds for fundamentals

After a rebound in 1Q19, all of the biotech indexes underperformed versus the broader markets in the second quarter.

The NASDAQ Biotechnology Index (NBI) was down 2%, the BioCentury 100 was off 3%, and the NYSE Arca Biotechnology (BTK) index saw the largest decline of 7%.

The broader markets continued to rise over the quarter, although their rate of growth slowed compared with 1Q. The S&P 500 ticked up 4% and the Dow Jones Industrial Average (DJIA) added 3%; whereas the two rose 13% and 11%...

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