NEW YORK - Investors are generally optimistic about biotechnology firms as a solid target, with mid-cap oncology firms being the most attractive, according to new results from a survey conducted by the Biotechnology Industry Organization (BIO) and Thomson Reuters.
The survey of more than 80 participants represented institutional, hedge fund and venture capitalist investment firms with $2.3 trillion in assets under management, including $266 billion in health care and $75 billion in biotech, said John Craighead, director of investor relations and business development for BIO.
Preliminary results of the survey were released Monday during a session at BIO's CEO & Investor Conference, with final results planned for release next month.
A majority of the respondents, or 42 percent, were from "plain vanilla" institutions, with a nearly equal representation, or 37 percent, from hedge funds, said Robert Rynd, director of corporate advisory services at Thomson Reuters. About 13 percent represented venture capitalists and 8 percent other types of investors, he added.
Thomson Reuters conducted the online survey and follow-up telephone interviews in December 2008 and January 2009, with the majority of calls occurring last month.
"An important and unique characteristic of this study is its timeliness," Rynd said.
What emerged from the study, he said, was that, despite one of the largest historical corrections in the marketplace, massive fourth-quarter 2008 redemptions and "unbelievable" volatility, "investors overall remain enthused about biotech," Rynd declared.
About 66 percent of respondents said they expected biotech to outperform health care in 2009, and 70 percent responded that the industry will outperform the rest of the market this year.
"This is a clear indication that biotech cannot be ignored by investors out there," Rynd said.
That positive outlook was evidenced in the survey in multiple ways, he said.
About 57 percent of respondents said they expected biotech to rebound during 2009, with another 30 percent responding that the industry will rebound in 2010.
In addition, 64 percent said now is a "good" or "very good" time to invest in biotech. "Only 6 percent said they think it is a bad time to invest," Rynd said.
The survey respondents said that as of July 1, they expected to see the BTK index at 744, or roughly a 15 percent return, he said.
Over the past five to seven years, Rynd said, biotech has come a long way as an investment.
Looking back at the 2001-2002 recession, BTK lost roughly 43 percent, "and investors in the past have been more inclined to walk away from the biotech sector when the overall markets are not performing well," he said.
For 2008, the BTK was down 18 percent, with the MBI index down 13 percent, Rynd said.
Yet, he said, "they way outperformed most of the other indexes out there by significant margins, and that trend has continued during the first month of January, which Rynd said is a "clear indication that biotech is no longer being ignored or passed over by investors."
"In some ways, you can make the statement that investors believe that there is more risk not having exposure to biotech," he said.
When asked what will drive the biotech space higher, Rynd said, the most cited catalysts were mergers and acquisitions (47 percent), an increase in positive clinical trial news (43 percent) and general market sentiment (38 percent).
Additionally, he said, an increase in the number of FDA approvals and earnings from bell-weather firms were cited as triggers. "Investors were telling us that they don't necessarily need to see a rebound in the broader markets in order for them to get excited about biotech," Rynd said. "You give them M&A at decent premiums and positive clinical trial news, and they are willing to jump in or stay investing in the space."
Rynd noted that, historically, there has been more focus on earnings from "the Amgens and Genentechs of the world." However, he said, "I think that's not the case so much now."
"They obviously are still critical components of the overall biotech space, but there is no longer this mentality of, how they go, so goes the rest of biotech," Rynd said. "I think there is a clear sign that the sector is maturing."
He noted that 51 percent of the respondents said that acquisitions will be the primary means for pharmaceutical companies to invest in biotech, with 32 percent citing licensing deals and 17 percent responding that development partnerships would be the primary means.
More than two-thirds said they expected more M&A volume in 2009 for pharma buying biotech of all sizes and large biotech buying small biotech, Rynd added.
However, he said, Pfizer Inc.'s bid for Wyeth and Roche AG's bid for Genentech Inc. "throws a wrench into the conventional thinking that M&A is going to continue to focus on the small- and micro-cap companies."
"A big conversation piece in the biotech community right now is, if the trend were to continue, what is the fallout for the rest of the biotech sector, and also, if these mega buyouts occur, where do those dollars then get reinvested," Rynd said.
Craighead noted that 60 percent of respondents said they expected overall R&D productivity in 2009-11 to be the same as it was in 2006-08.
Reasons for the limited clinical success cited included that the low-hanging fruit has been picked, R&D has been inefficient, higher regulatory hurdles, tougher targets and genomics still being in the early stages.
The survey results also showed that 59 percent of respondents considered biotech to be undervalued, with only 4 percent responding that it was overvalued, Craighead said, adding that there was mixed opinions about the credit crunch forcing "survival of the fittest."
Respondents also said that a change in market sentiment was critical for IPOs.
Not surprisingly, Craighead said, "a huge majority" of investors, or 81 percent, thought that the change in the capital environment, specifically the credit crisis and the impacts to the biotech industry, is having a significant effect on how they approach their perspective on investing in the industry.
According to the survey, 21 percent of respondents said a company's cash position is now more important and 68 percent said it is much more important. However, 53 percent stated that, although financial status is now more important, science is still most important, Craighead said.
More than 60 percent of respondents said that what they are really interested in now are profitable large and mid-cap biotech companies.
"So that is clearly pointing to the fact that they are looking for assets that are mature and have earnings that have sales associated with those products," Craighead said.
However, he noted that 37 percent said they see opportunity in micro- and small-caps.
Nonetheless, Craighead said, most investors will vary their methodology according to a company's market-cap, stage of development, therapeutic class and profitability.
Oncology overwhelmingly was the most attractive to investors, with 67 percent of respondents citing that space as their number one choice, with autoimmune and immunology cited as the second most attractive space.
Craighead said most surprising was that the metabolic disease drugs space was cited by only 9 percent of investors as the most attractive space.
He noted that the low figure was "not reflective" of the attendance at a panel about obesity drugs held earlier in the day Monday at the conference. "There's clearly a lot of interest in metabolic conditions," Craighead declared.
The survey's results also reflected that risk thresholds are rising.
While biotech has long been considered a risky sector, it attracts investors on the belief that life-threatening diseases have to be treated, Rynd said.
"In this environment, biotech investors are becoming risk-averse and their focus is definitely shifting to the company balance sheet," he said.
Only 38 percent of respondents said they would invest in a company with a market cap under $50 million, and only 34 percent said they would invest in a stock that trades less than 100,000 shares per day. In addition, only 26 percent said they would invest in a stock trading below $1, Rynd said.
However, investors overwhelmingly said they felt very comfortable investing in companies that trade below $5, with only 9 percent responding that they did not feel comfortable investing in firms trading below $5.
And critical to biotech, Rynd said, were the results showing that only 24 percent of respondents said they would invest in a company with no products beyond Phase I, and 19 percent responding that they would invest in a company with less than 12 months of cash.
About 68 percent said they would not invest in a firm that had six months or less of cash on hand. However, investors felt "fairly comfortable" investing in firms with 18 months or 24 months of cash, Rynd said.
According to BIO, at the end of October 2008, 38 percent of 370 small-cap companies essentially had less than one year's worth of cash, he noted.
The survey also attempted to gauge how investors perceived the effects to biotech in recent changes in Washington, with respondents mostly "positive to neutral" about the Obama administration, Craighead said.