Five Year Bull Market in Biotech
We attended the Bio Investor Forum in San Francisco this week and it was well attended with over 600 participants and over 120 companies presenting. Attendees included VCs , investors, industry executives, bankers, and media. The Bio Investor Forum is one of the best meetings for current issues and technology developments including a broad introduction to emerging companies in the industry. Although some excellent device and diagnostics companies attended, most of the presenting companies were in biopharmaceuticals.
Closing Plenary Session: How Fragile is the Biotech Rally After Five Positive Years?
This session was moderated by Todd Foley of MPM Capital and included five industry insiders on the panel. An excellent discussion ensued on the five year life science bull market, company valuations, M&A, IPOs, product breakthroughs etc. The panel concluded with the general feeling that fundamentals of the industry are much stronger now because of available financing, blockbuster products, scientific breakthroughs and profitable companies. Before we summarize some key points look at the following market data:
- Biotech stocks as measured by indices, ETFs and funds are up over 225% over 5 years : Fidelity Select Biotech Fund (FBIOX) up 236%, First Trust NYSE Arca Biotech Index ETF (FBT) up 228% and the iShares NASDAQ Biotechnology Index (IBB) up 242%.
- Five of the fastest growing biopharmaceutical companies beat the index performance: Alexion (ALXN), Biogen Idec (BIIB), Celgene (CELG) , Gilead Sciences (GILD) and Regeneron (REGN) and some have market caps comparable to Bristol Myers (BMY).
- In 2014 the sector (IBB) is up 20% but it has been a volatile year with extreme lows in April and highs in February and September. Q1 market volatility reached bubble-like behavior.
Here are some of my notes from the session:
IPO Market and Timing
Over 100 companies completed an IPO in 2013-2014. The timing for the IPO was critical due to overall market volatility with the best current “window” being late December 2013 through early January 2014. The IPO market is in a bit of a slowdown presently but of course it depends on the Company and market timing. A strong aftermarket in IPOs brings in more generalist investors.
A distinction was made between generalist and specialist investors, the latter being funds or ETFs that focus exclusively in the life sciences. Compared to prior years there is more money in “specialized” life science funds.
Market Cap Valuations of Public Companies
There was a good discussion of market valuations particularly as it pertains to M&A. A lively momentum driven bull market can present M&A issues if the market value substantially exceeds any NPV analysis of the company revenues by the acquirer. Since many biotech companies are at an early growth stage revenue forecasts are difficult. But it can be easier to value a public company than a private company because comps are easier.
As M&A picks up and the bull market roars on there is greater value in the pipeline for earlier assets.
The bull market gyrations can create challenges for management and investors because stocks take off with little or no news while financials remain the same.
Bull Market and Biotech Industry
Volatility such as we experienced in 2014 is likely to continue. MACRO concerns are unlikely to go away and this will create a risk-off situation and gyrate stock values.
Blockbuster products from Gilead Sciences (GILD) and Biogen Idec (BIIB) drove confidence in the biopharmaceutical market.
Political sensitivity is greater now as demonstrated by FED Chairman Janet Yellen and Sen. Chuck Grassley’s comments.
(ObamaCare -Affordable Care Act- has boosted the industry due to broader coverage of patients)
Overall the industry is much stronger than it was five years ago because companies have matured and there is better financing. Moreover there is proven economic value of cost effective products to combat diseases especially cancer and infectious diseases. “Therapeutic improvements drive value”
Although I agree with most of the comments from the panel we have to question their complete concurrence on the bullish sentiment. At least one on the panel should have voiced some caution or mention specific industry challenges ahead like drug pricing. Maybe their focus on building companies, developing products and raising funds makes them more optimistic compared to traders and fund managers who are in the daily fray of markets.