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Are We In A Biotech Bubble? You Decide
To let everyone’s favorite “diminutive” Fed chair tell it, biotech valuations have been “substantially stretched” for the better part of a year. Despite that, blockbuster M&A deals and IPOs for pre-revenue newcomers have managed to sustain the insanity despite the objections of both bubble-spotting naysayers and some industry insiders like Roche Ventures’ Carole Nuechterlein who recently predicted that “the end is coming.” Earlier this week we saw the sector slide amid a broad market decline and you can count us among those who think the fact that 109 out of the 150 companies in the NBI lost money over the last year is cause for concern given the sector’s absurd outperformance. Credit Suisse has now weighed in on the subject, as a new note out today asks “Are We In A Biotech Bubble?”
Here are a few fun facts to kick things off, including the rather astonishing note that biotechs have been the best performing sector for a half decade:
(a) Since 1/1/2011 the BTK has delivered 204% performance vs. 64% for the S&P500. The BTK is up nearly 400% since the previous peak reached during the mother of all bull markets, i.e. the dotcom fuelled 1999/2000 frenzy. The cumulative market cap of the 5 large caps is $513B currently up from $128B at the beginning of 2011 (and $82B at the beginning of 2001); (b) Biotech was the top performing sector for the last 5 years - 2011-2015; (c) The number of IPO's in 2014 (82 IPOs) has eclipsed the previous peak (67 IPOs) in 2000. There have been 12 IPOs YTD; (d) Multi $B valuations for SMID caps are now the norm. There are currently 44 public biotechs with >$2B market caps (outside the 5 large caps), 1 year ago there were only 26 and in 2011 just 14.
Ok so to summarize, the space has outperformed the broad market by a count of 3.5:1 over the past four years, is up four fold over a decade that included the worst financial crisis since the Depression, is riding a 5-year reign as the top performing sector, and the number of public companies in the sector with $2B market caps has tripled in four years. That all looks a bit bubblish to us. Not so, says Credit Suisse:
...we do not think we are in a "biotech bubble" per se (ok maybe the pendulum has over-swung a little!), but rather in a new era for biotech driven by fundamental changes in large and SMID cap biotech.
So basically, “this time is different.” Here’s why according to the bank:
"Biotech 1.0" is the “Hopes And Dreams Model”– Make great drugs for unmet medical needs (using great science) and sell them thus creating a unique (different to major pharma) infrastructure (high priced drugs with relatively small sales forces). Successful implementation of Biotech 1.0 allows a company to progress (or attempt) to "Biotech 2.0"– The “Nirvana Model” – Next (2nd) gen. blockbusters deliver unprecedented growth and profitability – this is what happened to BIIB, GILD, CELG and to a lesser extent AMGN 2012 to present (Exhibit 9). Biotech 2.0 not only delivered exceptional topline growth that was further leveraged to even higher bottom line growth but a massive improvement in operating margins…
Bottom line is that companies (both early stage and now even late stage - e.g. RCPT has raised $820M from its 2013 IPO to now) do not have to license/partner products to get them through the development process given the robust financing window. What would have been the take-out for Pharmacyclics if Ibrutinib was not partnered, likewise where would Medivation be trading if Xtandi economics were 100%?
Breaking that down, CS appears to be saying that we’re not in a biotech bubble because four companies managed to make it from the aptly named “Hopes And Dreams” stage to the “Nirvana Model” and because in a world where everyone is chasing after any semblance of yield, pre-revenue companies which normally would have needed to partner with a major or go bankrupt, were able to raise money and stay alive.
It’s interesting that in the world of biotechs, reaching “nirvana” is apparently when you are able to deliver top-line and bottom-line growth. There’s a name for that magical combination in other sectors as well: it’s called the “Running A Successful Business Model” and as it turns out, really isn't all that uncommon. Also, it’s not entirely clear that a “robust financing window” is something to be especially enthusiastic about. Obviously if a company that otherwise would have went out of business is able to stay around long enough to produce a lifesaving drug by issuing shares that’s great, but as we’ve seen with US shale plays, allowing otherwise insolvent companies to lumber around zombie-like by virtue of a market eager to snap up secondaries and HY issuance isn’t everywhere and always a good thing and it certainly is not a sign that the sector isn’t frothy. In fact, one might easily argue that if people are financing huge risks at non-economic spreads, we’re probably in a bubble.
In any event, have a look at the following charts and judge for yourself:
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As a reminder, here are the facts:
- Below is a chart of the 150 companies that make up the Nasdaq Biotech Index (NBI), broken down by Net Income.
- Of the 150 companies, in the last 12 months only 41 had earnings, i.e., Net Income, amounting to just under $31 billion
- Of this $31 billion in earnings, just 5 companies - Gilead, Amgen, Shire, Biogen and Celgene - had net income over $1 billion
- Just these 5 biotechs represented 83% of all the earnings generated in the NBI
- 109 companies in the NBI lost money in the last 12 months.
- In summary: only 41 companies in the index were profitable, which means 72.5% of biotechs lost money
- 83% of Biotech earnings were generated by just 12% of the companies
Visually this is shown as follows:
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Finger on the BIS ETF trigger!
everything is in a manipulated bubble singularity clusterfuck circle jerk orgy free for all.
so what i am trying to say is, can i borrow some money to buy some leveraged call spreads in this biotech EFT?
Another..fast food sector....at least they make money for now but at 40 x eps
Lots of bubbles make one huge bubble.
There is no bubble, only Zuul.
good, so let's index Credit Suisse's employee's salary and bonus pay (CEO!) to the biotech index! i'm sure they would put their money behind their convictions as they always look out for the little guys, right?
Plenty of military interest in Biotech.
Biotech industry should be combined with the war indiustry.
Re-lable chemistry as biotech and everyone climbs aboard. Pitiful.
Biotech is just the latest bit of shiny but the whole tech sector is in a bubble floating on vulture capital promises......
I think we are in a world wide debt bubble.
Sorry, bankers, you aren't going to get it all back (with profit).
Profit, schmofit. All we have to do double it, then tell J Yell to tell the Treasury to send us a 12 with some 10-12 zeros after it digitally. That way no one notices and we are free to head off to St Bart's, Tortola, or Antibes.
And how does Gilead make money? By having childless men pay out the ass for PrEP so they can have unprotected anal sex with their "partner." Can we stop just for a second so I can get off the crazy train? Fuck it, just slow down a little so I can jump.
We get to pay for it thru obozocare
Why do the BIO index futures trade so thinly with all the action in this sector? Any futures traders out there willing to chat? I have some questions about thinly traded futures contracts. How the heck are they settled when contracts like this trade so thinly? Does exchange settle them out correctly at the end of the quarter? Thanks.
Its because despite all the hype the sector is rather small. The total market cap of biotech is less than that of Apple.
Hey there is an idea! Apple has the cash to LBO every single 'biotech' stock in the world. If only we could come up with a catchy name to put 'i' in front of and sell it to the masses....
As far as the settlement they settle to cash.
http://www.cmegroup.com/trading/equity-index/us-index/e-mini-nasdaq-biot...
Of course we're in a biot(e)ch bubble...we have Ole Yellen, Jarrett, Nuland, Psaki, Hillary, Michael O, etc...
We live on a bubble. One prick from an errant asteroid, and....pooof!
with unlimited MANADATE OBAMACARE....It can go a LOT HIGHER. We are in the ONE BUBBLE TO END IT ALL!
The USA has lost most of its industrial competitive might and advantages except in few sectors. These sectors are
So, let us kill biotechnology so American people will have to use cheap, bogus, and useless medicine from India, China, Pakistan and rot in hell becoming another 3rd world country like Turkey or Egypt.
Very few biotech develop and market their own products. Instead, biotech companies invest huge amount of money developing new drugs. It takes ~$500M and 6-10 years to bring a successful drug to a market. This money come from financial markets and Big Pharma who partner with promising biotech companies.
As soon as new highly profitable drugs are developed or close to it, Big Pharma and major highly profitable biotech (like BIIB, AMGN, GILD, etc.,) are buying these biotech companies and market their highly profitable drugs. This is why most of biotech companies are not profitable since their mission is drug invention & developing instead of drug marketing and sale.
The case and point. Parmasett developed a cure for HCV (Hepatitis C virus) liver disease that kills hundreds of thousands people all around world. GILD has bought Pharmasett for $11B before the drug completed all clinical registration trials. GILD completed clinical trials, got the drug approved in America, EU, Japan, etc., and now the drug annual sale exceeds $18B making huge profit for GILD. This is a typical biotech business model.
Thank you assholes and scumbags who wrote this incompetent and stupid article. Thank you ZH for posting this shit on your website.
Everything you say is correct, yet it fails to address the question whether biotech stocks are in a bubble. You are not "killing biotech" by not buying stocks at bubble valuations.
My message was quite simple: one must measure biotech valuations based up on specificity of biotech business. Only an idiot will compare a biotech company valuation with the same criteria used for GM, HD, LOW, LMT, DD, etc.,
As I indicated, the overwhelming majority of biotech companies are developing new drugs with purposes of, in a case of being successful, transferring and/or selling their drugs and themselves to Big Pharmas or to top 5 biotech giants.
that looks just like the gold chart circa 2011.
The entire field of biotech is unquestionably still in itsvery early infancy.
The transistor; understanding of DNA; the solid state computer, and the internet have all been essential
to get biotech out of its "dark ages".
It required basic understanding of the fundamental aspects of DNA biology combined with quite recent developments computer technology for modern biotechnology and the Biotech Pharma Industry to really get off the ground...
As to the economic future of biotech??.
people will pay every cent they have in order to be cured of disease....
some will also cough up everything for any scheme that offers them "to live forever"...
The sky is not even the limit...
the economic limit is Greed and how much the traffic can be forced to bear
before Revolution will force the abandonment of private Biotech enterprise
as being unsustainable and non-viable..
I have a serious question, and wonder why no one ever asks this.
Where does the money come from to pay for these 'treatments' that for the most part dont actually save ones life? Most of these treatments costs tens of thousands of dollars per treatment and a significant segment is the elderly. So these healthy biotech profits are off the backs of the US taxpay funding medicaid/medicare.
The entire biotech industry is a big bubble funded by you, the US tax payer. So not only will the stocks fall, but once the unfunded liabiliites do finally surface it is very likely the majority of these drugs will no longer be profitable.
"Most of these treatments costs tens of thousands of dollars per treatment and a significant segment is the elderly."----really not true....HIV treatment has unquestionably saved the productive lives of a very significant population...Likewise drugs for liver disease and forms of cancer.
Perhaps one of the biggest problems is thats US patent laws that cover biotech and other drugs are laws patterned after the same-"sky it the limit, as much as the traffic will bear"- laws governing unnecessary widgets, rather than laws tailored to a commodity that is vital to the health and well being of humanity and the nation.
You fail to mention the many other monoclonal antibody treatments that do cost tens of thousands of dollars per treatment but do not cure anyone. They are quality of life drugs, produced by the large biopharma companies
Even if they are 'young productive' members of society, the treatments are paid by the tax payers. SInce the USA is BROKE, this ends up being done with interest so the costs increase.
At what point does the cost out weigh the benefit? Yes, I have been in a situation where I had to choose spending much of my savings to pay for quality of life drugs and I made the decesion based on the realities of the situation.
There is nothing wrong with profit but many of these biotech comanies are making 20-50 billion dollars a year on these drugs.
You still failed to explain where that money is coming from!!!!!
Also, there is a difference between biotech and pharma, which most ofthe treatments you are talking about are created...