Bull market turning to small-cap biotechs

March 13, 2014 ctheodoropulos

Finishing 2013 with a 66% return for the biotech indices, investors continue to be bullish on biotechnology companies. In a recent survey of institutional investors conducted by BIO, 57% of respondents forecast double-digit returns for 2014.

“It is quite remarkable that we have already reached double digit gains this early into the new year,” said David Thomas, Director of Investment and Policy Research for the Biotechnology Industry Organization (BIO).  The Nasdaq biotech index is outperforming the broader United States stock market, posting a 14% return against a 2% return for the S&P 500.

When asked about valuations for biotech stocks after the big gains in recent years, 55% of investors surveyed believe stock prices are in “fair value” territory. A third believe they are already overvalued and just 12% are finding opportunities they consider undervalued. This is a big change from just four years ago when 58% of investors surveyed found biotech undervalued.

Key for participants at BIO-Europe Spring®, he said, investors are turning to small companies. For the first time in five years, small caps are outperforming the large caps that have been driving the robust index performance.

In the January 2014 survey, almost two-thirds of investors predicted fewer IPO markets for the year, less than 43 companies that went public in 2013.  This sentiment is at odds with recent deal activity.  Twenty companies have already gone public, and another 24 have publicly filed S-1 forms with the US Securities & Exchange Commission (SEC).

Biotechs also delivered an impressive performance in pipeline-stage dealmaking in 2013, Thomas reported. Ranking US companies according to their R&D spending, he noted that the top five US biotechs completed 18 deals last year where the top five US pharma companies signed 31, and the top 5 European pharma companies signed 28. The numbers reflect company to company transactions for therapeutic compounds only, so do not include tech transfer, diagnostics, or deals for approved drugs.









“Though it is just two-thirds of what pharma did in deal volume, it is quite significant given the aggregate size of the biotechs by R&D spending or cash on the balance sheet. For example, the top five US biotechs spend a third of what the top five US pharma spend on R&D, USD 11 billion compared to USD 31 billion,” he said.  US pharma also holds three times more cash than the biotechs.

Perhaps the most important point coming out of the BIO survey, said Thomas, is that 76% of investors say they have seen a positive shift in the regulatory environment with respect to the risk-benefit analysis at the FDA. Further, by the same overwhelming margin they believe this shift has led to increased investment in biotechnology.

“Just a few years ago we did not have this sentiment and believe this is illustrative of how BIO’s efforts can effect change. By working with Congress and the FDA to reauthorize the Prescription Drug User Fee Act (PDUFA) in 2012, BIO helped reform the FDA approval process for innovative therapies,” he said, citing as examples the enhanced communication with FDA earlier in the pipeline, the breakthrough therapy designation, and extending the success of the accelerated approval pathway beyond cancer and HIV/AIDS.


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