The European Biotech Report
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Biotech: bruised now, but future bright
Framlington's Anthony Milford likes 'tool' makers
By Jesse Schulman, FTMarketWatch 12:46:00 PM GMT Nov 21, 2000
LONDON (FTMW) - - Shares in biotech companies have outperformed the markets all year but in the past two weeks have weakened dramatically. The Nasdaq biotech index dropped almost 7 1/2 percent in a day this week. Other indexes fell almost 10 percent.
Anthony Milford, who manages Framlington's Health Fund [F1:QGH], which is up 216.6 percent year-on-year to Nov. 17, handles assets of £400 million.
Q. Jesse Schulman: What do you make of the rather dismal performance of biotech shares at the moment?
A.Anthony Milford: The main issue in biotech is the weakness of the Nasdaq. It's being beaten up fairly badly, and the biotechs can't escape. They're getting infected by tech. There's no rational reason they should be, there's been no fundamental change, but that's what's happening.
A.On top of that, some of the chart technicians are watching the biotech indices like the American Stock Exchange Biotech Index [US:BTK] and they're saying it's broken down, so there's a good deal of shorting (short-selling) out there.
A.Milford: What's worrying me is the sheer amount of money that's been flowing into biotech.
Q. Schulman: Hold on a second. Why would that be worrying?
A.Milford: It's good for the industry, certainly, but not necessarily so good for the markets. It's a question of supply and demand - we've seen a number of big secondary offerings lately - Human Genome Sciences [US:HGSI], Immunex [US:IMNX], IDEC [US:IDPH] - you name it. They've raised billions of dollars in total, and as a result the market is suffering a bit of indigestion.
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[In recent share issues, Human Genome Sciences raised $825 million and Immunex raised $795 million.]
A.Milford: What it means is there's a surplus - too much paper on the market. Plus investors have to raise the money to pay for all that paper. On top of that, we've had a crop of lock-ups expiring, first from the big biotech IPO crop of March, April and May. Now the market is anticipating the next wave of lock-up expirations from the July IPOs.
[Purchasers of IPOs and secondary offerings are usually prohibited from selling their holdings for a pre-determined period, typically six months. When the lock-up ends, they are free to sell.]
A.Milford: There's a pattern - typically the selling begins a month before the lock-up expires.
Q. Schulman: Have the big biotech mutual funds been shorting biotech stocks?
A.Milford: Anecdotally, it seems so. I've heard that there's shorting by some of the funds. That's probably just really started developing in the last couple of days.
Q. Schulman: What then is the outlook?
A.Milford: Depends on your time-frame. In the near term, I'm always happier if the hot money is shorting my stocks, because the hot-money investors always reverse direction, and that means they'll be going in my direction soon. Technically, the market has improved in that respect.
[Chart technicians take substantial shorting in a stock as a bullish indicator, because it creates future demand for the shares, since the short-sellers eventually have to buy back the shares they've shorted.]
A.Milford: In the somewhat longer term, we are coming up on the H&Q conference [the annual Chase H&Q Healthcare Conference, taking place this year from Jan. 8-11 in San Francisco, a major biotech meeting where companies often announce important developments]. Historically, there is usually buying ahead of the conference. Also, mutual funds tend to have substantial inflows in January, and on top of that one hears that the funds have substantial levels of cash. So they are likely to be buying. Other things being equal, we ought to see some recovery in December. That's the normal seasonal pattern.
Q. Schulman: And long-term?
A.Milford: The long-term outlook for biotech is tremendous. The quality of IPOs has been high. Never before has the biotech industry had so much money. The fact that so many individual companies more cash in the bank than ever before means they can be more aggressive in their clinical trials, and they can take drugs further along before they look for a partner, which means they can retain much more of the added value.
A.I'm also very positive about tool companies - PE Biosysystems [US:PEB], Invitrogen [US:IVGN], Molecular Devices [US:MDCC] - quite a few have gone public this year, they've looked good straight out of the box though they've been beaten up lately. Genomic Solutions and [US:GNSL] Transgenomic [US:TBIO] are others. All this money the biotech companies have been raising is for research and development, and they have to spend it. They'll have to buy kit for genomics and proteomics and what-have-you, and these companies are the ones that will sell it to them.
Q. Schulman: Are there any important differences between the U.S. biotech market and the U.K. and Europe?
A.Milford: Europe and the U.K. haven't been beaten up as much. There is less volume, particularly in the U.K. The market here takes its cue from the U.S., but there is less volatility and they're hanging in rather better. |
