By Michael Brush
If you have the discipline to think long-term as an investor, this is the time to take advantage of the steep discounts on great biotechnology companies.
That’s the key takeaway from industry veterans at OrbiMed Advisors, ClearBridge Investments and State Street Global Advisors who shared their views at a Jefferies health-care conference in New York last week.
“Now is the time to find the gems,” said ClearBridge portfolio manager Marshall Gordon at the “Managing the Turbulent Waters” panel. “There is good science out there. Now is the time to figure out where it is.”
It is admittedly tough to gather the courage because of how difficult it is to live through a steep and broad decline in the stock market. And it is spooky, because there’s no obvious external catalyst for this crash, as we had in prior big drawdowns, said Sven Borho, a founding general partner at OrbiMed Advisors who now heads its public equity team.
Previous major biotech selloffs were caused by Hillary Clinton’s proposed drug-price controls in 1994, the end of the genomics craze in 2002, and the financial crisis and health care reform in the past 14 years. There’s no comparable big-picture overhang now. That makes it more difficult to imagine when the doom and gloom might ease.
Of course the reason for this biotech debacle was the high valuations in areas such as gene editing. And Wall Street launched too many initial public offerings that were “science projects” (no clinical trials).
But that doesn’t really explain the severity of the damage. “We are in the longest biotech bear market, with the biggest absolute drawdown and the biggest relative underperformance,” said Borho. The average IPO is down 75%. The good news is the extensive damage may mean all the excesses have been wrung out by now.
Otherwise, here are seven factors that will turn the biotech sector around, followed by several stocks these biotech experts singled out as favorites.
1. Biotech buyouts finally pick up
“Mergers and acquisitions are very important,” says Borho. “It is typically how a bear market ends.”
The stars may be aligned. Fantasy buyout valuations are being reined in. The buyers have the means.
“There is a lot of money on the sidelines,” said Shalabh Gupta, a health-care portfolio manager at State Street Global Advisors. “Big pharma has the capital to get involved.”
There may still be a price gap between what target companies will accept and what pharmaceuticals want to pay. “When the market comes down, big pharma gets risk averse, too,” says Borho. “They don’t know if they can get a better price. They all want a billion-dollar-plus drug at a company trading at a 52-week low and sitting on a lot of cash.”
But they’re also starting to realize that’s not happening. Both sides are getting more deal-hungry. Recent news that Bristol Myers Squibb /zigman2/quotes/202559280/composite BMY +0.51% will buy cancer-therapy company Turning Point Therapeutics could be a sign that sellers are more amenable, and no longer holding out for the higher stock prices of a bygone era, says Jefferies biotech analyst Michael Yee, who hosted the panel.
This deal may signal to other big pharma boards that it’s time to move on buyouts.
“This is exactly what we need to happen,” says Borho. “We don’t need 10 of those — we just need a couple. Once it gets going, everyone gets antsy and board members ask, ‘Why haven’t we made an acquisition? Are we missing the bottom?’ Turning Point could be the turning point for our sector.”
Time will tell. But Borho has been in biotech investing since 1991, so he has good intuition about sector trends.
2. Investors figure out the macro-economic trainwreck is not so relevant
Biotech is down in part because of the “risk-off” mentality created by fears of inflation and recession. But biotech exists mainly in the world of science. So, does this even make sense? Maybe not.
“The beauty of biotech is that it is idiosyncratic,” says Gordon, at ClearBridge. “You can create value from research and development. It has nothing to do with macro,” or broader economic trends. He cites the relatively good performance of Biogen /zigman2/quotes/201531540/composite BIIB -0.61% , Gilead Sciences /zigman2/quotes/210293917/composite GILD -0.73% and Genentech during the bear market of 2008.