London’s biotech stocks have been on a decent run over the past twelve months.
The top pharma and biotech firms have registered a 10% increase year-to-date according to FTSE.
You wouldn’t know for instance that the sector is home to some of the stock market’s standout performers.
Just look at 4D Pharma (LON:DDDD), a Manchester-based pharmaceutical firm, and cancer treatment specialist Tiziana Life Sciences (LON:TILS), which have tripled in value since listing on AIM earlier this year.
A buoyant market for fundraising is always a good a sign that a particular market is in rude health.
Still, UK investors have been comparatively slow in joining the biotech.
Healthcare, including biotech, is set to finish 2014 as the best performing sector in the S&P500 for a fourth year in a row.
In fact, biotech and healthcare funds have done so well that US Federal Reserve boss Janet Yellen in July thought the valuations of smaller biotech and social media firms were ‘substantially stretched'.
This was enough to knock US$40bn off the Nasdaq biotech index. Even so, the closely followed benchmark is up over 40% this year.
So, is sentiment likely to turn against the sector in 2015?
The outperformance "begs the question of how much longer this streak can continue," JP Morgan's small and mid-cap biotech analysts wrote in a recent report on the US market.
“Fundamentals still look strong, and we remain generally constructive on the sector heading into 2015. That said, investor selectivity could become increasingly important."
"We continue to expect investor risk appetite for biotechs to be driven by high-profile clinical and regulatory catalysts and commercial performance," the analysts wrote.
There are some big risks, according to Credit Suisse analysts.
“Some sort of product or late stage pipeline blow up could happen – we know this is overdue,” said Credit Suisse in its Global Biotechnology outlook for 2015.
“Multiple back-to-back product blow-ups, especially in ‘class of 2013/2014’ IPOs, where many companies have now blown through the $1bln mark, could cause a flight of momentum money out of the sector.
“The current valuation of many small-caps and IPOs means that failure has a very high price.”
There is also a risk of the financing window closing, which would divide the field into the ‘haves’ and ‘have-nots’.
If this were to happen, the newest companies with only a couple years of cash would be viewed as significantly higher risk.
Still, Credit Suisse believes the US sector is set for a fifth consecutive year of gains versus the S&P 500 index of major American stocks.
Much of the biotech buzz in recent years is down to the US Food and Drug Administration (FDA).
The agency has allowed a greater number of drugs to come to market more quickly, which has meant costs have been dramatically reduced.
Touting its performance at the start of December, the FDA said it had approved 35 new drugs in 2014 compared to 27 in 2013.
It also reached a milestone with a record 15 approvals for rare diseases. The previous high was 13 drugs in 2012.
According to broker Killik, the sector has arrived at an “important point of maturity”.
“Broadly, we’re seeing a number of biotech drugs getting FDA approval,” said Killik’s head of equity research Nicolas Ziegelasch.
He believes the industry is set for an annual growth rate of 17% for the next five years versus the S&P at 9%.
Two biotech funds - the International Biotechnology Trust (LON:IBT) and Polar Capital’s Biotechnology Fund – stand out for Ziegelasch.
But for those that haven’t kicked the biotech stock picking habit and still avoid funds – where can the individual opportunities be found?
The rapidly evolving and increasingly important immuno-oncology field is set to be an important area of focus.
So-called immuno-oncology therapies, which basically use the natural capability of the patient's own immune system to fight the cancer, are seen by investors as one of the most promising ways to fight this killer disease in development today.
“Cancer will also have a huge year as the promise of immuno-oncology therapies are further tested” said Amy Brown at EP Vantage.
THREE TO WATCH IN 2015
Vernalis (LON:VER) is one AIM stock to watch in this space.
The firm has licensed worldwide rights for vipadenant (V2006) - aimed at helping cancer sufferers - to Boston firm Redox. Shares have climbed to 48p and are up 27% since the start of the year.
e-Therapeutics (LON:ETX) is worth a mention. The firm has a pipeline of two drugs for cancer treatment and had its drug discovery activities rated as world class last week by a national assessment.
Nanobiotix (EPA:NANO), which is dedicated to cancer treatment, is also set for a big year.
The firm and its partner PharmaEngine are to accelerate the clinical development of its breakthrough radiotherapy treatment in the Asia-Pacific region.