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Short sellers keep sights trained on biotechs

Short sellers are continuing to target biotechnology stocks as one of the frothiest sectors in US equities staggers after a bruising August.

After climbing high during the seven-year equity bull run, biotech companies fell hard last month when the global sell-off sent the sector briefly into bear market territory and gave short sellers reason to cheer.


Short sellers borrow shares they expect to fall in price, then sell them, aiming to buy them back later at a profit before returning them to the lender.

Almost 90 per cent of biotech stocks on the Russell 3000 index of smaller-cap US companies fell in August according to Markit, and the shares that made the biggest declines were more heavily shorted.

"It was a good sector play," said Relte Stephen Schutte, analyst at Markit. "[Biotech] short sellers definitely made some money in August."

Short sellers have not relented, with the average short interest in North American pharmaceuticals, biotech and life sciences companies on the Russell 3000 gaining ground throughout August.

The average percentage of shares on loan is now at 7.3 per cent, its highest level this year and well above the index average of about 4 per cent, said Mr Schutte. The figure is second only to energy stocks.

Biotech stocks on the small-cap index are now down 12.8 per cent since their July peak, while the Nasdaq Biotechnology Index, which was up an impressive 31 per cent this year at its peak in the same month, has since fallen 12.9 per cent as investors pulled their cash from biotech exchange traded funds.

BlackRock's iShares Nasdaq Biotechnology fund was among those that recorded the largest redemptions in August. More than $800m, or almost 13 per cent of assets under management, left the fund in August, but the ETF has still returned 9.9 per cent this year.

The Nasdaq Biotech index is still up 14.6 per cent year-to-date and has gained 470 per cent since March 2009, having been up as much as 580 per cent in July over the same period, making it one of the best performing sectors in US equities since the financial crisis.

Like all equities, biotechnology companies have been lifted partly by the Federal Reserve's loose monetary policy since the financial crisis, but also by investors chasing the returns that follow the discovery of new drugs.


The exuberance in biotech stocks has led to comparisons with dotcom-era bullishness.

Initial public offerings have swelled, with start-ups taking to the public markets to finance the development of drugs with blockbuster potential. In 2011 just 11 biotech and pharmaceutical companies floated, compared with 84 last year.

However, the more traditional route — a licensing deal or acquisition by a larger, established pharmaceutical company — has not faded and the number of IPOs this year has waned slightly after 2014. According to Dealogic, there have been 37 biotech and pharma IPOs year-to-date.

"IPO optionality is at play as acquirers look to snap up early-stage companies with compelling technology and large markets before an IPO," said Silicon Valley Bank in a research note this week. It predicted that venture capital-backed biopharma mergers and acquisitions deals would exceed the 2014 total.