Conway: Of some 61 companies to come (and remain) public since 2000, only seven are currently above their IPO prices. As such, even if there were a turn in general market sentiment, absent some major change in industry paradigm, it seems highly unlikely that investors will come flocking back to biotechnology en masse any time soon. With the public markets likely to remain all but closed as a funding source, and with big pharma virtually blind to all save marketed or near-to-market products, the vast majority of private companies only have their venture investors to fall back on, and it is unlikely the firms have the funding to support these companies’ product-development efforts through to market.
Napodano: In 2008 we saw a pretty significant split between the performance of large-cap pharmaceutical and biotechnology names versus their small-cap brethren. It was a horrible second half of the year for any company that released subpar clinical trial results or attempted to raise cash. The capital-raising environment continues to remain extremely difficult given the tight credit markets and low stock prices, so we are recommending investors focus on larger-cap, financially secure names. However, there are a few smaller names that could represent excellent investments in 2009.
Raynovich: Despite one of the worst years for investors since the Depression with market indices down 40%, biotech stocks provided a safe haven from the leveraged credit cowboys in 2008 with major bio ETF’s down only about 10%. My balanced biotech portfolio with 75% in large caps and ETF’s was up 3–9% in 2008 depending upon weighting of mid-cap winners such as Cubist Pharmaceuticals (CBST), Myriad Genetics (MYGN), and ViroPharma (VPHM). If you want to look back to more difficult times, look at 2002 and the early 90s.
As a result of the global meltdown and avoidance of risk, hedge funds, mutual funds, and speculative investors sold biotech and pharma stocks to raise cash. Many high-flying biotech stocks did worse as the hedge funds that created the momentum were forced to take profits as their leverage was cut back.
At the recent Rodman and Renshaw Investment Conference in November, the buzzword was cash runway as smaller-cap companies with weak balance sheets may need to retrench until new money comes back into the market. Nonetheless, Rodman continues to fund PIPES (private investment in public equity) in the biotechnology sector, as technology is progressing, and deals are being done.
Other than the large caps, the market is currently skewed toward traders, so investors should be aware of seasonality and volatility that masks longer-term trends. Despite other opinions, my experience is that Q1 is not the best time to add new positions but Q3 is, because you want to position yourself for a stronger Q4. Moreover an early Q1 rally can be over by February 1.
The retail trade and investment banks are not major participants as in previous years, so hedge funds and institutional investors are the drivers of stock performance. Lately, pundits on financial news channels have been offering positive commentary on the biotech sector, which can be a contrarian indicator.