Biotech financials: Part 2 — the Belgian stock market

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Biotech is a sector that involves considerable risk: The amount of capital required is huge, and any clinical research program has a fairly large chance of failure at any stage of the development process. While this might not sound like an attractive area of investment, biotech shares are rewarding for the faithful. Investing in biotech stocks can be a lucrative pastime, but only for the steel-nerved among us. In this second part of our series on biotech financials, we take a look at the biotech stock market with ex-biotech analyst Jan De Kerpel, Executive Director at Kempen & Co.

Biotech stocks are notoriously volatile, plummeting to the depths in times of recession but potentially soaring to immense heights when good news arrives. According to De Kerpel, this is firmly connected with the profile of Belgian biotech companies. Specifically, the low liquidity of the stocks, a measure of how easily a stock can be traded, is regarded as an Achilles’ heel.

“In general, biotech companies in Belgium are relatively small and loss-making, and daily share trading or liquidity is low,” explains De Kerpel. “If the economy is facing a downturn, these are the stocks that take the first hits. The slightest tendency toward selling weighs heavily on the stock’s price, because there aren’t many buyers in the first place. Also, recapitalizations, which are frequent in biotech because of the high cash burn, are usually bad news for the share price. On the other hand, biotech shares have soared since 2012, mainly because investors were looking for higher returns. People were looking up instead of down, and in that case, biotech is a sector with huge potential. This makes biotech companies on the Brussels stock exchange very volatile.”

Keep in mind, though, that this characterization applies only to Belgian biotech. Compared to the bouncy, lightweight companies we have here, American multi-billion biotech firms such as Regeneron, Biogen and Gilead are much better suited to withstand a financial sting.

Fan club biotech

Another typical characteristic of Belgian biotech stocks is the remarkably high involvement of the “common man,” or retail investor, on the stock market. De Kerpel elaborates:

“The retail investor is very important for biotech stocks. They make the stocks move, they make sure there is trade in a specific stock. Major company shareholders usually don’t do much with their stocks, and institutional investors wait for a recapitalization or IPO to invest in a company, since these are pretty frequent in biotech. So it’s up to the retail investors to provide liquidity. Although it seems a little contradictory, this liquidity is also important for professional investors. They aren’t eager to invest in a stock that isn’t traded a lot, because they want to have a quick exit when needed.

We also see that, in Belgium, retail investors like to participate in IPOs or capital raises. In neighboring countries such as The Netherlands or Germany, this is simply non-existent. In France, small private investors are encouraged to participate through tax incentives, but the enthusiasm of the Belgian retail investor has a different origin. Belgium has a long history of biotech IPOs, starting with Innogenetics as far back as 1996. In the last 10 years, at least one biotech has come to the stock market every year. [Ablynx CEO] Edwin Moses once said that the Belgian private investor is very much a supporter, a fan of Belgian biotech, and he’s absolutely right. Belgium is a ‘pharma country’; a lot of people work in the sector and relate to it. Biotech is also very visible: It’s frequently featured in the press and media, and initiatives such as FlandersBio and BioVox help in doing so. The local environment is crucial for successful IPOs, and Belgium and Brussels is a very biotech-friendly environment.”

[Ablynx CEO] Edwin Moses once said that the Belgian private investor is very much a supporter, a fan of Belgian biotech, and he’s absolutely right.

Speculation rules the nation

However, biotech-friendliness at Euronext Brussels took a turn for the worse in 2016. The Belgian government implemented a so-called speculation tax, where traders pay 33% of stock trade profits as a tax if the particular stock has been in their portfolio for less than 6 months. Designed to discourage large-scale speculation, the tax had an especially detrimental effect on small biotech stocks.

“It’s a killing blow to smaller, high-risk companies who are dependent on the retail investors, and biotech companies fit that bill perfectly,” De Kerpel says. “It’s incomprehensible to me that the government invests a lot in the sector, and does so very professionally, while at the same time implementing a rule that particularly impacts that same sector. Fluent share trading, which is so essential for biotech stocks, is seriously hampered by this tax. Imagine having to pay 33% of your profits while still taking the risks of investing in biotech. Retail investors simply stop participating, and the stock is completely blocked. My plea is for a serious revision of the measure, especially for small companies with higher-than-average risk.”

The speculation tax is a killing blow to smaller, high-risk companies who are dependent on the retail investors.  Biotech companies fit that bill perfectly.

Go with the newsflow

Despite all this, biotech remains one of the most interesting sectors for investors, with high returns when companies are able to successfully develop new therapies and deliver on their business plans. But how can the retail investor find his or her way, given the complicated science and difficult-to-predict stock prices inherent to the biotech market?

“Before investors get into biotech stocks, they should realize that it’s a risky undertaking,” De Kerpel advises. “If you’re going to lie awake at night because one of your shares didn’t perform as predicted on good or bad data, maybe you shouldn’t invest in this sector. Also, buying biotech stocks and leaving them on the shelf for months or years isn’t a good idea. There’s a lot of newsflow in biotech to which share prices can react, and this should be followed closely. Of course, companies communicate what they want, so how do you interpret this one-sided and often complicated news? Look for different channels to acquire news: go to investor forums, read analyst reports, perhaps take a look at investor magazines. These will help you to form a clear judgment. Also, company events are interesting. You can get to know the details of a company, and, more importantly, get a feel for the management. People can easily estimate if a CEO knows what he or she is doing or if they’re dealing with a cowboy.

Another tip: Don’t be afraid to take some profit when things are looking good. When the entire sector is performing well, sell part of your biotech portfolio. At these times, high valuations are less company-dependent. Those are great opportunities to take profits. These can then be used to buy when shares are lower due to macro-economic circumstances.”