Big Money Steers Clear of Biotech

NEW YORK -- This week's BIO CEO investment conference, held here over the past three days, was a rather dour affair, offering yet another illustration of the challenges facing small and mid-cap biotech stocks so far this year.

Institutional investors were hard to find at the Waldorf Astoria hotel, with many dedicated biotech buy-siders apparently deciding to sit this conference out. That's a problem, because BIO CEO is supposed to be the confab where Wall Street gets to meet the small and under-covered biotech companies that typically have trouble snagging invites to other, larger institutional investor conferences.

This year, there were a lot of biotech CEOs presenting their stories to half-empty rooms filled with industry consultants, glad-handers and insiders. Those folks with the means to buy stock in size just weren't there.

The reasons are fairly obvious: A nasty stock market and looming threat of recession has put investors in a foul mood. In this atmosphere, risk is most definitely a four-letter word, so there are few institutional investors willing to take on even more by loading up on risky small- and mid-cap biotech stocks.

As I worked the conference rooms chatting up the few biotech buy-siders who did attend BIO CEO this year, the mood was very sedate. It's been a tough year so far for many, even if the biotech sector, broadly speaking, hasn't performed as badly as some other industries.

A couple of themes stood out from my conversations here this week. First, small- and mid-cap biotechs aren't going to get that much attention this year unless they have meaningful near-term catalysts that can move the stock. This echoes defensive views I wrote about recently.

Second, even those lucky biotech companies with big clinical trial results pending or drug reviews in front of regulators are going to find the road rough. Since so few biotech investors are adding a lot of risk to their portfolios right now, the enthusiasm to get in front of potential stock-moving events just isn't what it has been in the past.

Case in point: Keryx Pharmaceuticals(KERX Quote). The company presented Monday, announcing the completion of a pivotal phase III study of its diabetic nephropathy drug Sulonex. The data from this important study will be ready for release by the end of March, CEO Michael Weiss said.

I had a lot of discussions at BIO CEO over whether the Sulonex study would succeed or fail. I heard good arguments on both sides. With Keryx shares falling to around $6 today from $10-$11 just a few months ago, you'd think the risk-reward in the stock would be favorable for those investors who believe the Sulonex trial will be positive.

Yet what I heard more of from Keryx "bulls" -- for lack of a better term -- was a sense that there wasn't a rush to buy the stock in front of the phase III data release. If Sulonex is a winner in March, Keryx's stock will surge. But investors (at least those I spoke with) would rather wait to buy Keryx after the major risk event is out of the way, even if that means missing the initial pop in the stock price.

To them, that's better than having Keryx on their books if Sulonex fails and the stock gets creamed.

I say all this not with the intent to scare investors out of biotech completely. If I did that, no one would read my columns! But it's important to understand the tentative and conservative investment mood that exists out there right now so you can temper your expectations and plan accordingly.