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Spin and dazzle

11 January 2016 By Robert Cyran

Biotech is beginning its biggest yearly bash with a hangover. After a couple of years of astonishing drug approvals, IPOs and merger activity, the healthcare industry’s mood is noticeably less revelatory in the runup to this week’s annual gathering hosted by JPMorgan in San Francisco. Inflated valuations could make it harder for growing companies to persuade investors in attendance to hand over their cash.

It is a sector that has been merrymaking like never before. The Nasdaq Biotech Index returned about 10 percent in 2015 in a flat year for the S&P 500 Index. There was more than $550 billion of healthcare mergers unveiled last year, more than twice as much as any other year, according to Thomson Reuters data. And the U.S. Food and Drug Administration approved 45 therapies, after green-lighting 41 a year earlier. That’s about twice as many as was typically approved a decade ago.

Yet the good times may be slowing down. The index is nearly 20 percent lower than the high reached last summer. And because it’s so heavily weighted toward profitable titans like Gilead Sciences and Celgene, the smaller and highly speculative stocks have been hit far harder. Disappointing data from gene-therapy trials, concern that politicians may limit price increases and worries that generalist investors may flee the sector have all played a part.

Fears also may be deepening. Secondary offerings, for example, have been greeted harshly this year. Ten companies announced share sales on Jan. 5. All were hit hard, with an average decline of 20 percent for what were largely limited dilutions.

All the approved drugs of the past few years, especially for small-population orphan diseases, suggest ripening technologies may be laying the groundwork for a golden age of biotech. The problem will be bridging an investment gap.

Most of these firms aren’t profitable, and few have enough money to weather an extended financing drought. That means lining up financing now in case conditions get worse would be wise. A lucky few may attract big pharmaceutical buyers or partners, but others will have to go to public markets cap in hand. This year’s JPMorgan conference may be a pivotal moment for many of them.


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