New year, new optimism for UK health care/life sciences sector?

There are signs of a more positive environment for biotechnology investment in 2010, following two challenging years, says Lala Gregorek, an analyst at Edison Investment Research in the firm's Edison Insight 2010. In 2008-09, access to capital largely defined the fortunes of UK small-cap biotech companies, but had been significantly curtailed - often restricted to existing investors - by the cyclical downturn in biotech and the global credit crunch, she stated.

The finalization of US health care reform in 2010 should remove any associated uncertainty and stimulate increased confidence in US health care investment, which may trickle across to the UK. The recent biotech initial public offerings in the USA and the flurry of financing deals in the UK at end-2009 are indicative of a positive shift in investor confidence. Nevertheless, said Ms Gregorek, a more cautious approach should be taken with healthcare sectors exposed to discretionary capital spending, eg, medtech.

Last year, the companies with solid management, good assets and sufficient funding fared best; these criteria for stock picking will remain important in 2010. Cash remains a primary determinant of the longevity of stand-alone biotechs, and, with many companies continuing to trade at depressed valuations, upcoming clinical and regulatory catalysts will be critical in influencing partnering or M&A activity. During 2010, we expect big pharma to continue their quest for quality assets to fill pipeline gaps ahead of the looming patent cliff/black hole, and also envisage some ongoing consolidation within small caps.