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Interviews with, and survey responses from, more than 80 biotechnology analysts, investors, and portfolio managers revealed significant optimism about the outlook for the sector. Despite the turmoil in the fourth quarter of 2008, the ripple effects of the credit crisis, and the uncertainty about a recovery for the global economy, the investment community expects the biotech sector to outperform in relative and absolute terms during 2009. Not surprisingly then, 64% of the study participants state that now is a “good” or “very good” time to invest in biotech.

Investors anticipate a surge in mergers and acquisitions this year, led by large-cap companies taking over smaller ones with promising pipelines and thus giving a general boost to valuations in the sector. Investors do not expect overall R&D productivity to improve, but they do foresee advancements in the clinic and some FDA approvals that will serve as catalysts for the sector‟s positive performance. Investors are eager to see significant operational improvements made inside the FDA. The study respondents also indicate there will be stabilization and a general rebound in the broader market that should propel biotech share prices higher.

The participants acknowledge that the credit crunch has forced them to alter the methods they use to evaluate investment opportunities in the biotech sector. There has been a dramatic increase in the focus, priority, and importance placed on a company‟s cash position. There are mixed opinions about the effects of the financial crisis. Some fear that liquidity constraints will prevent even the firms with sound management and good candidates from obtaining the funds they need to sustain their operations; others almost welcome these pressures that should drive more efficient use of capital.

As one might expect, investment approaches vary – from investor to investor, from subsector to subsector, and even from one stage of development to the next. Nevertheless, the analysts do share some preferences that collectively outline an investment sweet spot. Generally, they favor mid-cap companies with late-stage pipelines that include oncology treatments. However, roughly one-third of the participants see better opportunities in smaller companies still in the early stages of R&D. The group tends to avoid companies with candidates in therapeutic classes where regulatory scrutiny and competitive pressures are high.

When determining the value of a particular stock, investors first analyze the growth of revenues, current and/or future. They then discount those top-line streams accordingly before applying basic comparative multiples to set an appropriate price. In response to the spike in market volatility, investors have lowered their tolerance for risk. For biotech, that means a sharper focus on indicators of viability, particularly cash burn, but also share price, trading volume, and market capitalization.

Analysts and portfolio managers expect an uptick in activism in 2009, but their reviews of prior efforts to shake up Boards of Directors, chief executives, and strategies are not all favorable. These investors are not mirroring the decisions made by the so-called “smart money.”

Face-to-face engagement with senior management remains the most critical component of the investment process. These asset managers are relying less on sell-side research and events, but attending more industry conferences to gather intelligence. When speaking with CEOs, CFOs, and IROs, investors want to hear clear, consistent, and honest assessments. Moreover, they stress that, especially in the current market conditions, company management should proactively and regularly reach out to the investment community to describe their objectives, plans, and achievements.

 

 

.....(계속)