Biotech Investors Surge Happily Into New Year, “Frothy” or Not, Says Cowen

Published: Jan 05, 2015

Biotech Investors Surge Happily Into New Year, “Frothy” or Not, Says Cowen
January 5, 2015
By Riley McDermid, Breaking News Sr. Editor

Investor exuberance continues to be a concern for the booming biotech sector, as a new year brings new risk and volatility and a mid-December check reminded Wall Street that not everything can be good news all the time, said a new report from Cowen and Co. on Monday.

“December was a volatile month for biotech stock performance. Favorable ASH newsflow pushed stocks to new highs. However, a mid-month market correction triggered a 6-7 percent correction in the NASDAQ Biotechnology (NBI) over the course of a week,” wrote the Cowen Biotechnology Team after meeting with investors to gauge overall marke sentiment.

“The markets rebounded quickly, allowing biotech stocks to again achieve new highs, but also exhibit new signs of frothiness (IPOs 20X oversubscribed) stocks trading up into secondary offerings?),” they said. “Then came the ABBV/ESRX formulary announcement, which wiped 7 percent off the NBI in two trading days. This was followed by the Christmas holiday, which infused a sense of calmness into the market, and brought with it a Santa Claus rally in biotech.”

In the note, titled Cowen's Biotech Thermometer, and lead by analyst Ritu Baral, Cowen’s team argues the despite the “frothiness,” fundamentals remain.

“Throughout the roller coaster ride, interest from generalist fund managers remained high. Yes, we detected some signs of ‘panic selling’ in late December as investors debated the consequences of the AbbVie /Express Scripts Inc. deal on biotech's pricing power,” said Cowen. “However, generalists appear to have grown more comfortable, not to mention savvy (more so than specialists may want to give them credit for) about all aspects of biotech, including the pricing environment. As a result, generalist PMs appear willing to return to the sector at a faster pace following each subsequent biotech selloff.”

Cowen said this phenomena also likely reflects the dearth of alternative growth investment opportunities.

“In addition to wanting to know what the generalists are doing, specialists are interested in talking about investment themes for the New Year, any early 2015 binary events, and which companies will have something to say at the upcoming industry conference,” they concluded.

“In general, specialists continue to worry much more than generalists about the sustainability of biotech's stock performance (how can biotech outperform the S&P500 for a sixth straight year?), and welcome the mini sell offs that keep investor exuberance in check,” said Cowen.

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