New Biotech Survey Says Sector Will Outperform

Biotechnology Industry Organization (BIO.org) has conducted a survey of 80 investors, analysts, and venture capital executives with Thomson Reuters to preview their opinions of the biotech sector and expectations for 2009.  The study was intended to improve communications between biotech executives and investors.  There is a problem with the data because it is from December 2008 to January 2009. That was at least before the February and very early-March slump pushed markets into a free fall.

Among those surveyed, 64% believed that it was a “good” or “very good” time to invest in biotech.  Also, 81% of the group said that market volatility and the credit crunch has changed their approach to investing in biotech. The biotech sector was also classified as undervalued by 59% of those surveyed.  As far as the best opportunities in the Biospace, that was mostly put in the mid-cap range with 43% preferring valuation there and small-cap coming in at 26%.  But as far as which stage of the pipeline, that was overwhelmingly (85%) put in the late-stage pipeline.  Most surveyed (62%) also preferred profitable companies, and an overwhelming percent of 93% preferred the U.S. over Europe and 94% preferred the U.S. over Asia.

While most preferred biotech over “the rest of healthcare”, many (53%) said that when they invest in biotech that they compare biotech stocks to other biotech and other healthcare stocks rather than just to other biotech stocks alone.

But the overall investment process does not actually look that different from traditional investment analysis. 72% of methodology did vary by market capitalization, 85% of the methodology did vary by stage of development, 63% did vary by therapeutic classes, 39% did vary by geography and some 80% did vary by profitability versus unprofitable.  The other analysis is actually very similar to traditional growth stock analysis in profitable companies as the the first most important notion was revenue growth and the second was a Price/Earnings analysis followed by earnings growth.  In unprofitable companies, the most important notion was still revenue growth.

Companies with high cash reserves are definitely preferred over those with low cash reserves.  Of those companies with 6 months of cash on hand, 68% said they would not invest. The lines blur between those with 12 and 18 months of cash, but 76% said they would invest in a company with 24 months of cash.  Behold, cash is still king.

The more speculative side of the cycle is also interesting.  In companies with no products, 61% would not invest in companies just beyond Phase I studies, but then 48% said yes to investing beyond Phase II.  On stocks under $1.00, only 26% said they would invest and 43% said no.  But under $5.00 stocks, 74% said they would invest.  This also looks like the same notion… small cap or low price is fine, but penny stocks are still too risky for most.  Market caps are also important as well and as the market cap goes down so does the interest: 55% said they prefer $100 million but when you get to $10 million the yes group was only 15% and the no group rose to 64%.

Of the index drop at the time, Mergers and acquisitions was the top catalyst to move the sector with 47%. Also, 66% believed that biotech would outperform the rest of healthcare and 70% believed biotech would outperform the overall market in 2009.  51% believed that Big Pharma would invest in biotech via acquisitions.

The three most important research methods for investment opportunities in biotech were meetings with management (60%), and then sell-side research and medical/industry conferences coming in at a tie at 45%.  Interestingly enough, only 9% said that looking at filings to see where the smart was invested was listed as “very important.” But then the largest method of finding new biotech investor ideas was medical and industry conferences at 40% and 59% of those surveyed listed medical and industry conferences as being of significant value.  As far as where the two largest investment opportunities lie, Oncology was overwhelmingly the winner followed by autoimmune and immunology opportunities.

The full 36 page study is available here if you wish to see more detailed notes on other aspects of the survey

Jon Ogg