Biotech investors have had to cope with the “significant headwind” of higher interest rates over the past two years, but a couple of catalysts may revive the sector, according to a pair of specialist investors.
Biotech companies are businesses which will likely earn the greater portion of their revenue in future years rather than today, so higher interest rates are a negative for the sector.
This is because higher rates offer a more immediate return on cash, disincentivising investors from buying assets that take longer to deliver a return.
The extent of the sell-off is outlined by Woody Stileman, who runs the RTW investment trust, a biotech fund, who said: “This is the second longest bear market in decades.
"The mid and small cap part of the market fell 80 per cent, then from 1 November last year to about 1 March this year, the market rallied as investors begun to price in lower rates, as those expectations have been revised since March. So biotech shares, particularly in the mid and small cap area, have performed less well.”
Paul Major of Bellevue Healthcare said the speed and scale of rate increases, rather than the fact rate rises occurred, spooked investors.
He added that given equity markets as a whole performed well in recent years, and created a situation where, “investors who didn’t own biotech stocks didn’t really suffer as a result”.
Turning to what could lead to a change in sentiment, Stileman believes lower rates will make help drive a change in sentiment as valuations are already cheap, and he believes the recent uptick in merger and acquisition activity in the sector is a sign that sentiment is changing.
Major agreed that lower rates may be a catalyst, but added that one of the restraints on the sector had been that M&A activity had been restricted by competition law in the US. He feels a change of presidency in the US could change this.
David.Thorpe@ft.com
