The manager of The Biotech Growth Trust has warned there are signs of overheating in the small-cap biotechnology space.
Geoffrey Hsu, a partner at OrbiMed Capital Partners, which runs the trust, said while valuations in large-cap biotechnology stocks did not look stretched when viewed alongside their growth profile, it was slightly different with small caps.
“With small- and mid-cap names you need to be a bit more careful,” Mr Hsu said.
“There are a few that may be a touch overvalued compared with their risk profile.”
The manager said there had recently been a number of companies that had listed on the stockmarket at quite elevated levels, taking advantage of the huge demand for biotechnology stocks that had led to its rally in the past five years.
This revival has led The Biotech Growth Trust to return 376.4 per cent in the period, data from FE Analytics shows.
But the sector has recently suffered what Mr Hsu termed a small “flash crash”, which he speculated could have been “profit taking” due to the lack of a clear catalyst for the sell-off.
The Nasdaq Biotechnology index declined 4.4 per cent last Monday alone as a result of this sell-off.
Biotechnology firm Biogen Idec, which The Biotech Growth Trust’s latest factsheet shows is its largest holding at 10.9 per cent, has been hit due to slowing sales of one of its leading drugs.
The company revealed late last month that sales of its multiple sclerosis drug Tecfidera had fallen 10 per cent in the previous quarter.
However, Mr Hsu said the outlook was still positive for the sector, with a number of new, innovative drugs in the pipeline, a “friendly” regulatory backdrop and consistently high merger and acquisition activity.
