• Introduction
  • Biotech M&A Cycle
  • Biotech IPO Cycle
  • Does Valuation Matter Within Biotech?
  • Conclusion: At Least Society (If Not Investors) Will Benefit from Biotech Investment


News about Abbvie’s acquisition of Pharmacyclics last May certainly got our attention. It would be an understatement to say that the price Abbvie paid at ~40x revenues raised our eyebrows. This acquisition along with client inquiries, pundit commentary, several biotech stocks having been core shorts for many months in the Kailash Capital (“Kailash”) bottom-ranked stock portfolios, and the stock momentum shifting negatively over the last few months led us to believe that the time was ripe to review past Biotech cycles and see how recent data compare to history.

In particular, clients seem to be wondering after the nearly sevenfold increase in the Biotech sector index since 2009 whether the recent 20%+ pullback represents an opportunity or suggests further risk. After reviewing the history of the Biotech cycles and looking at valuations, we see more risk than opportunity in the sector. Data indicate that we are very late in the cycle. M&A activity is running near the second-highest record level for both number of deals and dollar volume. Even more concerning is the fact that deals that have been done in 2015 have been at valuations that are 3x-4x previous peaks. This would seem to suggest significant speculation and even a potential bubble. IPO activity tells a similar story. The number of IPOs was recently at record levels, and the market cap of IPOs is at the highest level by far since the Technology Bubble. Between M&A and IPOs, capital appears to be flooding into the Biotech industry at a time when valuations for the sector are near historic peaks. Over 75% of the stocks in the Biotech sector are currently trading above 10x Price/Sales. History shows that valuations this high for Biotech stocks have usually led to meaningful underperformance for not only the expensive stocks but also the entire sector on a forward basis with nearly twice the level of volatility of the market. Our reading of history suggests that even after the recent 20%+ pullback, Biotech seems to offer a poor risk-reward proposition and likely unattractive risk-adjusted returns from these levels.

Kailash Concepts’ fundamental, bottom’s up, biotech research team continues to identify companies that it believes can outperform in this environment. This research piece from Kailash is intended to give you proper perspective on the objective data points that we think warrant a more cautious approach toward the broader sector.

The recent pullback since July may suggest that the rally is fading, as the 3-, 6-, 9- and 12-month momentum all just turned negative for the first time in years. Figure 1 below shows the performance of Biotech stocks as measured by the Nasdaq Biotech Index (NBI). The performance of other Biotech indices and ETFs looks similar. Biotech stocks peaked in July after having risen fairly steadily each year since 2009 and going up nearly sevenfold from trough to recent peak. However, sentiment has shifted negatively over the last few months with the index down over 20% since the July peak. There is reason to believe that the speculative market in biotech may be in for a long decline relative to the market.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.


The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

October 9, 2015 |

Categories: White Papers

October 9, 2015

Categories: White Papers

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