Don't Bail on Biotech
We see opportunity as fleeing investors trigger an irrational sell-off.
The biotechnology sector has been hit especially hard as investors flee high-risk assets amid recent market uncertainty. Compounding this heightened risk aversion is increased concern regarding product concentration for one-drug operations and the ability of development-stage biotechs to access equity markets in the wake of plummeting stock values. Furthermore, Dendreon's (DNDN) announcement that sales of prostate cancer drug Provenge will come in well under the market's initial expectations for the year caused a ripple effect throughout the sector as investors dumped shares of firms nearing the launch of other highly anticipated drugs. Investors also appear to be unloading shares of unprofitable biotechs with dwindling cash balances on the concern that volatile market conditions will limit firms' ability to raise capital.
We think the market's indiscriminate sell-off of risky assets presents attractive risk/reward trade-offs for investors who can handle the ride. Specifically, market overreaction has pushed shares of Dendreon, InterMune (ITMN), Exelixis (EXEL), Savient Pharmaceuticals (SVNT), Vanda Pharmaceuticals (VNDA), and MannKind (MNKD) to attractive levels, in our opinion. With the exception of MannKind (which enjoys the financial backing of billionaire entrepreneur Alfred Mann), all of these biotechs have at least a year's worth of cash on hand, which should provide them with more flexibility to wait and tap the equity markets under more favorable conditions.
Lauren Adams does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.