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How Sick Will Brexit Make Biotech and Pharma?

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In tandem with the broader markets, the biotech indices reeled on the news of Britain's vote to exit the European Union. Given the uncertainty and dire economic forecasts, The Life Sciences Report has reviewed commentary from sector experts and biotech publications to help investors understand what Brexit might mean for the industry.

Following the Brexit vote, the NASDAQ Biotechnology Index (NBI) lost more than 200 points, then ping-ponged back to regain nearly half its losses, standing at ~2,670 on June 29. Likewise, the NYSE.Arca Biotech Index (BTK), which lost nearly 300 points but had made substantial gains by June 29.

The volatility has enlivened what has been a slow year for biotech and pharma stocks, which took a hit in the first weeks of 2016 and have been in a slump ever since. Optimism remains, but the markets appear to be taking a breather after outperforming for the past several years.

The Brexit vote could stifle a rebound, as reflected in the headline for a biotech industry overview note from JMP analyst Michael King: "Brexit Will Likely Push the Pause Button on Biotech for a While."

King noted that the biotech indices "underperformed the broader averages last week. . .in what was, in our opinion, a massive swing to risk-off behavior."

But the exodus from biotech is not likely to last, King wrote. "Experience tells us that when markets turn sour, as they have now, and investors flee the space, it is exactly the kind of environment where we believe investors should be accumulating shares, especially amongst those that investors view as most risky (i.e., development-stage companies with valuable assets and/or productive drug development platforms)."

Echoing the mantra of most biotech analysts interviewed over the years by The Life Sciences Report, King reiterated the industry's strong fundamentals, including "upside surprises from key data readouts [and] unanticipated M&A" as among the factors that will ultimately "revive the sector from its funk."

Cantor Fitzgerald's Bryan Brokmeier, in an industry report dated June 24, writes that the Brexit decision is "a slight negative for the life science tools and diagnostics space." He too cites strong industry fundamentals as a buoy for the sector. But he acknowledges that tools and diagnostics companies "do have high currency exposure and may face multiple contraction along with overall markets." In the wake of Brexit, Brokmeier favors "life science tool companies with less exposure to industrial end markets and strong balance sheets."

Brokmeier also notes that "If European growth slows and governments introduce stimulus, companies with high exposure to academic and government research would be the biggest beneficiaries."

In commentary posted by Forbes, biotech analyst Steve Brozak, president of WBB Securities, wrote, "The realities of newly uncertain markets will shake every major pharmaco" in the wake of the vote. "Portfolio managers were not prepared for this. But no amount of financial modeling can tell us where Europe and the world will go because the ramifications and repercussions are so far reaching."

Among the issues that the industry will have to confront moving into Brexit, Brozak cites the "hit" to Big Pharma's sales in the UK and EU, uncertainty in capital markets and how that will impact initial public offerings (IPOs), regulation by the European Medicines Agency (EMA) and the ability of companies to profit from inversions.

Alan Leong of BioWatch News refrained from comment on Brexit specifically, but did note in a short piece published on June 28 that "because of their presence in Ireland, BioMarin (BMRN:NASDAQ) and Prothena (PRTA:NASDAQ) are especially taking hits." BioMarin's stock price was ~$83/share before the vote and dropped to ~$73/share after; the price was ~$79/share as of June 29. Prothena's shares were at ~$40.50 before and plunged to a low of about ~$33.80 before rebounding to ~$36/share as of Wednesday.

The companies' exposure to Brexit uncertainty is tied to sales revenues, but Leong believes, in the case of BioMarin, that "the reaction was, frankly, a bit overdone."

GEN (Genetic Engineering & Biotechnology News) interviewed several analysts and sector experts in the United Kingdom in a report published on June 24. The publication cites DeLoitte's director of UK Center for Health Solutions Karen Taylor as being concerned that funding and regulation for the biotech industry within Britain could be at risk.

"Currently the European Medicines Agency can grant pharmaceutical companies a single marketing authorization, providing faster access to the whole of the EU market, half a billion potential patients," she told GEN. "The level of disruption following a Brexit would depend on whether the UK remained part of the European regulatory framework. If not, the UK will have to resume separate authorizations and inspections, leading to duplication and delay."

For Arpita Dutt, writing on Brexit and biotech for Zacks, "The first thing that comes to mind is the impact of Brexit on the drug approval process in the UK and EU. . .with Brexit, a lot now depends on whether the UK will remain within the ambit of the EMA the way countries like Norway are, or whether the UK will set up its own regulatory authority for drug approval. . .if the UK sets up its own regulatory agency, the approval process could end up being lengthier as well as more expensive for companies seeking UK and EU approval for their drugs."

On June 27, GEN posted Brexit responses from biotech scientists and company CEOs. Though several commenters asserted that some significant impacts would be short term, concerns about how Brexit would impact regulation, tax structures, intellectual property, funding from a variety of sources, retention of talent, and ability to collaborate across borders were expressed.

Such concerns "will inevitably affect [companies'] ability to focus on their pipelines," Goeff Davison, CEO of Bionow in the UK, told GEN.

The Life Sciences Report's Small-Cap Biotech Watchlist, composed of 22 small-cap biotechs, showed some resilience to Brexit, with no major losses for companies related to the vote.

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1) Tracy Salcedo wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
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