In spite of the overall performance of the biotechnology sector in the past five years, many companies have suffered as the sector tends to rely on serial injections of equity rather than debt. When risk appetite disappeared there was no desire to invest in these companies in spite of the lack of debt.
David Pinniger, £132.4m International Biotech Trust investment manager, notes: “What ended up happening is that we had a bit of a shakeout of the industry, where the lower quality assets and management teams were not able to attract capital like they had in the mid-noughties and so it was survival of the fittest.”
Mr Pinniger argues this has left the industry in a stronger position three years later, as the weak companies have fallen away and are no longer diluting the efforts of the higher quality companies by taking capital away from them.
“You’ve had a sector that has actually performed pretty well because capital is being made available and new technologies and products are beginning to deliver. The sector is having a bit of a purple patch and certainly it has performed really well versus the broader market.”
Michael Sjöström, manager of the £611m Pictet Biotech fund agrees that a sell-off in equities in 2008 affected small and micro-cap companies the hardest, particularly in the biotech sector as these typically do not have any cashflows and are five to 10 years away from any material sales.
“These companies are usually in a fairly delicate situation in terms of financing and have to go back to the equity markets every 18-24 months, so in the context of the financial crisis when everyone wanted to stick to safe havens, everybody anticipated these companies would have to go back to finance in a very poor environment. So you had this massive discount or dilution in 2008.”
In addition 2011 was an equally tough year for biotech as the European sovereign debt crisis saw investors favour dividend paying equity stocks, which are not usually found in biotech.
But Mr Sjöström adds; “Since then we’ve seen a fairly sharp re-rating for biotech stocks across the board, I think that ties in with the fundamentals which have all along been a bit better than the market action has suggested.
