And another overview:
Large cap biotechs should outperform small caps
The BIO-I Score stayed at -4. But, large cap values are below historical norms,
possibly better reflecting greater reimbursement/pricing risk and competitive
pressure. Large cap values have improved relative to small cap biotechs. Demand
remains weak for biotech stocks as measured by aftermarket performance of followon
offerings and fund outflows have accelerated. Supply has hit an all-time high,
which will act as an overhang for small caps. The economic cycle, which has
favored cyclical over non-cyclical growth stocks, is negative for biotechs. And,
technicals suggest money is flowing away from biotechs.
Greater relative value in large caps vs. small cap biotechs
The large cap PEG of 1.50x is below historical norms, possibly better reflecting
greater reimbursement/pricing risk and competitive threats. But, only 15% of
biotechs are trading at <2x cash & 5% trading at <1x cash, which is at the low end
of historical norms, suggesting small/micro cap values may be stretched.
Weak demand from healthcare investors bad for small caps
Weak demand for biotech paper and cash outflows from biotech funds are
negative for small caps. Biotech follow-on offering performance has been
dramatically negative with only 2 of the 16 follow-ons done YTD remaining above
deal price with a median return of -16%. IPOs are being priced below filing
ranges. Negative fund flows have accelerated with an average weekly cash
outflow of ~$240 MM and YTD outflows of $1.45 B.
Supply at an all-time high could be overhang for small caps
There is $9.6 B of potential supply in the pipeline, which is an all-time high, and
could act as an overhang for small cap biotechs. If biotechs rally and the
financing window opens even slightly, we would expect a flood of new paper to
overwhelm demand.
Economic cycle & technicals still negative for biotech
The economic outlook has favored cyclical growth over non-cyclical growth, which
is negative for biotech stocks. In addition, technical analysis suggests that money
continues to flow away from healthcare, which is a defensive sector, and money
within healthcare is flowing incrementally more towards large pharma than biotech. |
