EU-biotech – coping with avoidance
These days, front-page biotech-related headlines are as rare as reports of a sector-driven rally. Supranational threats and crises, on the other hand, are practically everyday events. For instance, it would have been groundbreaking news that would have sharpened investor perception if some of the CFOs of those biotech companies with sufficient cash levels had wisely optimized their returns by partial investments in gold throughout 2010. Unfortunately, they did not.
Instead, markets in 2010 have been affected by high volatility and a general lack of appetite for risk. This is reflected in a continuous trend – on a global scale, money is being taken out of dedicated healthcare funds. In total, US $ 1.7 bn has been pulled from funds this year so far, after 2009 had already seen an outflow of US $ 2.1 bn. It is therefore not surprising that in these difficult market conditions, US biotech stocks clearly outperformed Europe yet again, supported by good M&A business and favorable pipeline and marketed drug news.
While both US indices (AMEX Biotech and Nasdaq Biotech) were up 24 % and 10 % respectively in the first ten months of 2010, the WestLB EU Biotech Index (comprising the 20 largest European firms by capitalisation) managed a return of just 2 %. Indeed, investing in all 122 listed biotech companies equally would have delivered a combined loss of 5 %. Furthermore, as roughly a third of the industry as a whole gained in absolute terms – while former portfolio darlings like Actelion, Qiagen and Intercell were down – overall sentiment was weak amongst sector specialist and general investors, especially in Europe. With a current lack of incentives, it was difficult to convince deeper-pocketed generalists to play biotech as a great beta story. Therefore, the key question remains; will they be returning anytime soon?
We think they will. To lure back investment, the industry needs a string of meaningful product deals and takeovers. This is not unlikely, as roughly 50 compounds have shown proof-of-concept and are waiting to be signed. Moreover, we regard half of the top 30 firms with market-caps above EUR 250 m as potentially attractive targets.
Both are crucial. For general investors, a product deal means validation by an insider, while successful takeovers are not only a welcome exit strategy but also the best way to enhance intrinsic value. We think the current bid for Movetis by Shire is a good example, where the offer price represented a 75 % premium to closing price and was 55 % above the IPO value. We may also see renewed interest in the sector now that some profitable biotech stocks can be classified as value stocks in comparison to “big cap” pharma, given that these offer higher growth prospects at a reasonable price.