The “Golden Age of Biotechnology”? —After the storm, an update.

Why the biotechnology sector will continue to underperform after the sharp decline.

In July 2015, I published an article (The “Golden Age of Biotechnology”? recommended reading for the full perspective on the sector) explaining at length why I thought the biotechnology sector was overheating and vulnerable to a potentially sharp correction.

Since then things have taken a rather dramatic turn for biotechnology, a little update on where things stand seems warranted.

In the last 2 months XBI and IBB have declined respectively -30% and -25% (General market volatility and comments from Hillary Clinton certainly contributed to the action, but she only provided the small nudge to make that fruit, that was already very ripe, fall).

To sum up my views I don’t expect biotechnology to have a meaningful recovery even after the magnitude of this sharp decline and expect potentially more downside.

When I objectively look at all the different pieces of the puzzle I don’t expect biotechnology to rebound anywhere near previous levels, now that the music has stopped, it will of course have some rallies with the rest of the market, but even if the overall market rallies in the end of the year I expect biotechnology to underperform versus the rest of the market.

Other than to trade some of these brutal, but often shortlived, rallies you get during declines, I would keep avoiding the whole sector, from the big caps to the smaller more speculative development stage names.

A lot of the reasons for this view stem from what I expanded on in thearticle in July, but mainly it comes down to the basic supply/demand equation and how it is so strongly skewed to the downside after the massive excess and the staggering amount of capital that was deployed in the sector the last 2 years.

A vast segment of the listed biotechnology sector(no revenues, IPO in the last 3–4 years, that’s $10s of billion of market capitalization) has been propelled by faith in some “narratives” and analyst fantasy models, once the faith is eroded, there is no real support to some very subjective valuations, and if you combine that with all the supply in the market and the forced selling dynamics that have now been triggered, it’s a tough road ahead.

This chart is very telling:

A sizable portion of that money is now looking for the exit, but due to the shift in sentiment and the perception that the environment may be changing the bid is a lot thinner while the supply is potentially massive (all time record healthcare/biotech equity issuance this year, off the charts). Number of institutional money managers surveys have also shown biotechnology/healthcare as the most overweighted sector in 2014 and 2015, it is likely that a number of managers have now turned a lot more cautious and are looking to pare down that weighting.

All of this makes for a lot of trapped money having been deployed at higher prices that will now offer many layers of additional resistance to the upside that could make any bounce short lived.

Also on the other side, the current environment where risk is being repriced (with VIX settling in a new normal 16–22 range vs the old 10–15 we have known for prolonged periods of time in recent years), triggering a reduction of exposure to the riskiest areas of the market(biotechnology sitting arguably on the extreme edge of the risk curve), means that the pool of money chasing and bidding the riskiest assets is now being shrunk.

A striking example of how the supply/demand dynamic has shifted very dramatically: Bluebird Bio (BLUE), one of the, if not THE, absolute favorite of analysts and managers in the development stage biotech group ( has been described by some analysts covering the stock as the potential next big biotechnology platform stock); in late June this company raised $500 million in 3 hours after the close of the trading day, now while it has dropped 50% from the pricing ($170 — >$85), relentless decline in a bid-less tape(while there has been basically no fundamental news or change to the story).