Historically, the biotech industry was less impacted by market conditions due to its unique characteristics. In large part, biotech stocks have been event-driven. Specifically, investors are more focused on clinical development and pipeline advancement for individual biotech companies.
However, current market conditions have exerted a negative impact on the valuation of individual companies in the biotech industry. We believe the different impact current market conditions have exerted is mainly due to the credit crunch.
Most biotech companies are in early or middle development stages, and continuing financing is an integral part of their operations in order to advance their drug pipelines. Under current market conditions, liquidity has dried up for some companies, and raising capital has been extremely difficult in the past few months. Some companies are forced to enter into survival mode to reserve cash by restructuring. Some even have to suspend operations or file for bankruptcy.
OPPORTUNITIES
Based on our belief that this time the biotech industry is more negatively affected by the current credit crunch rather than the economic slowdown, we do see opportunities existing for some biotech companies. In this broad, undifferentiated, beaten-down market, we believe companies with less financing pressure may benefit from the recovery of the broad market.
Specifically, companies with strong balance sheet and low cash burn rate, and/or with approved products on the market, will survive amid the current bleak economic conditions. At this point, ?cash is king? is the single most important factor to evaluate a biotech company, especially for smaller ones.
With the above criteria in mind, our top picks for the biotech industry are BioMarin Pharmaceutical Inc. (BMRN), Regeneron Pharmaceuticals Inc. (REGN), Onyx Pharmaceuticals Inc. (ONXX), 3SBio Inc. (SSRX), AMAG Pharmaceuticals Inc. (AMAG) and American Oriental Bioengineering Inc. (AOB).
WEAKNESSES
Recently, we have seen increased numbers of biotech companies who are forced to suspend operations or file for bankruptcy due to cash shortage. It is extremely difficult to raise any additional capital due to the current credit crunch and economic downturn. Therefore, we try to avoid companies with great financing pressure in the next 6 to 12 months.
These names include Genta Inc. (GNTA), Dynavax Technologies (DVAX), Critical Therapeutics Inc. (CRTX), Decode Genetics (DCGN) and Anadys Pharmaceutics Inc. (ANDS). All these tiny biotech firms have great pressure for further financing in the next 6 months and they have entered into a survival mode in order to save cash since it's almost impossible for them to raise additional funds anytime soon.
Grant Zeng, CFA is a senior analyst covering the biotechnology industry for Zacks Equity Research.
