FT: Hedge Funds Buying Up Flailing Biotechs

Financial Times headline: Hedge funds scoop up biotech stocks after ‘catastrophic’ declines

Subheadline: Some managers expect cheaper valuations will fuel M&A activity


Hedge funds are hunting for bargains in the beaten-down biotechnology sector, betting that a vicious sell-off has run its course and that lower valuations will breathe life back into deal flow.

A Nasdaq index of biotech stocks has tumbled almost a third from its all-time high last August, as hopes about the Covid-19 pandemic boosting the industry gave way to worries about frothy share prices. The sharp sell-off has, in turn, left many companies struggling to raise new funding.

However, some hedge fund managers now believe that prices have fallen too far relative to firms’ drug development prospects and their remaining cash levels. Those investors have started buying up stocks on the cheap, or launching portfolios to capitalise on the turmoil.

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Industry insiders attributed the sell-off in the sector in part to the departure of so-called tourist investors who do not specialise in biotech but who were hunting for returns during the early stages of the pandemic. Investors have also grown concerned about regulatory scrutiny of dealmaking and the possibility that companies may start to run out of funding.

The ensuing market reversal has proved particularly difficult for a sector that had grown accustomed to record-low interest rates and a seemingly never-ending equity bull market. Such companies’ future profits are highly valued when interest rates are near zero, but appear less so when borrowing costs rise.