(Bloomberg) -- Biotech stocks slumped in October, backing off a run-up that might have led the Nasdaq Biotechnology Index back toward its 2015 record. The 5.8 percent drop was driven by disappointing third quarter earnings from mature biotech companies as well as key drug pipeline failures. With November off to a cool start, analysts are hoping sentiment may warm back up, at least for small- to mid-cap biotech companies. More established pharmaceuticals may start looking to merger and acquisition plays to bolster flagging sales and pipelines, although from “a position of weakness,” a Cowen analyst wrote.
Cowen, Biotech team led by Eric Schmidt
“Unless you've broken your own thermometer, you won't need ours to tell you that sentiment has shifted in a major way. Just a few weeks ago there was talk of a new product cycle, upward earnings revisions, and a glass half-full view toward pipeline augmentation via M&A. Today the prevailing wisdom is that newer launches have run their course, management guidance can't be trusted, and acquisitions will need to be consummated from a position of weakness.”
“In stark contrast to the large caps, views toward small-, mid-cap biotech have changed very little. Many investors have taken the glass half-full view that big biotech's woes portend of a favorable M&A environment. And with many small-, mid-cap biotech companies having yet to launch a product, the ‘buy the dream, sell the reality' view is free to prosper. Perhaps the one thing that has affected s-mid cap sentiment is a more measured outlook for fundraising. September/October were heavy months for banking activity, and some capital markets fatigue appears to be setting in.”
Jefferies, led by Michael Yee
“Large-cap earnings stock action was tough although we ran up to 2-year highs going into it. There were high expectations going into October given the rally and thus we don't think anything materially changed (except for Celgene) and some pullback is not a shocker. October is a historically tough month for biotech after seasonally softer third quarter results and then we predict a relative rally for November and into December which are typically stronger months for biotech into year end and into January health care conference announcements.”
“Despite the Celgene disappointment, we think generalist investors are still relatively warming to biotech as valuation is not expensive especially relative to the broader market, and interest is picking up in mid-cap biotech which continues to trade well as a beneficiary of large-cap revenue woes and plenty of M&A potential. We think biotech is building towards an industry new cycle slowly in 2018 but really more so in 2019 where there is much more major data.”
Suntrust, led by Peter Lawson
“Biotech sentiment has become more cautious following a very weak third quarter earnings for therapeutics companies, compounded with pipeline concerns. Consequently, biotech indices have retraced gains made earlier in the month, and underperformed the broader market again. On the flip side, we see positive data by year end that could lift sentiment and drive individual stock performance. For the balance of the year, we like near-term catalysts from MacroGenics Inc., Mirati Therapeutics Inc., Sage Therapeutics Inc., Catalyst Pharmaceuticals and Celgene Corp.”
“Despite the down tick, we believe biotech is favorably positioned — Drug pricing rhetoric is easing, biotech is now trading at a four-year price-earnings ratio low, while the broader market has been hitting new all time highs. While M&A has not yet materialized - slowing top lines from profitable therapeutics companies could be a catalyst for M&A, in addition biotech appears well positioned with multiple sets of validating data, and a series of new therapeutics approved or poised to be approved in 2018.”
To contact the reporter on this story: Cristin Flanagan in New York at cflanagan1@bloomberg.net.
To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Morwenna Coniam
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