Small Companies, Big Returns
The broader biotech indices are up more than 30% this year and have reached levels not seen since the peak of March 2000. Larger biotechs account for much of the index returns, and have helped the sector outperform the S&P 500 by twofold. But how have smaller biotech companies been performing?
As of November 30th, 27 companies that started the year under $1 billion in market capitalization have jumped 100% or more. That is a little more than the top decile for biotechs of this size. This is a respectable percentage given that only 72 of 1730 (or 4.2%) small companies in other sectors had returns of 100% or more. Here is a look at the top performing small biotech companies that started 2012 under $1B:
Of course, in biotech, picking winners requires a lot of hard work. With dedicated research teams and deep industry knowledge, skilled investors have been able to outperform equal weight baskets of securities and the major indices. One fund manager that has been able to do to just that is Peter Kolchinsky, whose fund, RA Capital, has been able to beat the average returns by a wide margin over the last ten years. In his words:
"Smaller, development-stage companies cannot be understood through their financial statements the way larger profitable companies can be. You have to differentiate between good and bad science, data, trial design, and target markets, all on borrowed time as cash burns down. We have a great team dedicated to dissecting the fundamental basis for everything these companies do and we try to anticipate the chess game that companies play in competitive fields. That's helped us make some good investments. But we always appreciate a little luck."
Kolchinsky is one of hundreds of biotech investors that will be attending BIO's next investor event, BIO CEO & Investor Conference, February 11-12, 2013. As the world’s only independent conference focused on publicly traded biotechs, it is the essential event for scouting next year’s winners through programming such as Therapeutic Workshop panels, Business Roundtables, and company presentations.
For the full article on small cap biotech performance, read more on our blog here.