Health-Fund Outflows Hit $8.6 Billion Despite Biotech Rally

(Bloomberg) -- The investor exodus from health-care and biotech funds continued for another week, pushing this year’s total net outflow to $8.6 billion even as biotech stocks capped their first monthly gain since June, according to Piper Jaffray.

In the past 11 weeks alone, investors have pulled $3.3 billion out of health-care and biotech funds, according to Piper analyst Christopher Raymond, who cited an analysis of data from Lipper/AMG Data Services. “When will this end?” he wrote in a note to clients.

The analysis includes 112 health-care and biotech funds with about $74 billion in assets. The flow patterns are a “key dynamic” to monitor as periods when money is moving into the them has historically correspond with biotech outperformance, while periods marked by withdrawals have corresponded with underperformance, Raymond said.

At the same time investors were pulling money out of the funds, the breadth ratio for the Nasdaq Biotech Index -- a measure of the number of stocks advancing relative to the number declining -- has inched closer to levels indicating a trough, falling to 0.38 from 0.44. The ratio rarely dips below 0.3. When it does, it’s linked to a bottoming in the index, Raymond said.

Money kept flowing out of the funds as the biotech index climbed 7.7% in October. The rebound came amid some positive surprises, including renewed hopes for Biogen Inc.’s Alzheimer’s disease drug, an early regulatory approval for Vertex Pharmaceuticals Inc. and positive results from Seattle Genetics Inc. and Mirati Therapeutics Inc. But it hasn’t been enough to bring back generalist investors who fear changing drug regulations and a potential tamping down of M&A from some of the Democratic candidates for president.

Cowen biotech analysts saw “signs of life” from generalists in biotech. But “overall they remain largely uninvolved due to the lack of large cap growth and the overhang of health-care reform.” Some investors were hurt by not owning Biogen ahead of a 26% rally on plans to file aducanumab, and they have been adding the large-cap biotech back to their portfolios. But it’s too soon to tell if the interest will persist.

The bank’s analysts expect event-driven trading strategies and sector specialists will continue to drive the market as they get involved ahead of drug pipeline catalysts. According to Cowen, Acadia Pharmaceuticals Inc. is among buyside favorites as investors look ahead to dementia-related psychosis results-- as is Seattle Genetics before a more detailed look at tucatinib data in December.

Adding to sector weakness, biotech initial public offerings have also seen a streak of lackluster debuts, including Oyster Point Pharma Inc., which priced at the low-end of its offering range post-market on Wednesday. In the last few weeks, Vir Biotechnology Inc. also flopped, BioNTech SE had a poor trading debut and Swiss biotechnology company ADC Therapeutics SA pulled its filing.

As sentiment deteriorates, Cowen said it was likely “that strong IPO candidates will continue to get funded,” but investors would be “increasingly selective” from now into next year. The biotech gauge was up 2.3% on Friday, reaching the highest since July, led by BeiGene Ltd. after a $2.7 billion Amgen Inc. deal for a stake in the Chinese-American drug developer.

--With assistance from Crystal Kim.

To contact the reporter on this story: Cristin Flanagan in New York at cflanagan1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Jennifer Bissell-Linsk, Richard Richtmyer

©2019 Bloomberg L.P.