In January we noted that despite Janet Yellen’s “irrational exuberance” moment when, last summer, the Fed chair mentioned biotech as a sector where valuations looked “substantially stretched,” biotech stocks have continued their relentless ascent [4] thanks in part to M&A deals worth 40 times sales and IPOs for pre-revenue companies.
Now, with the sector still making new highs, the bubble chorus is getting louder.
Via Bloomberg [5]:
Biotechnology had the biggest weight Thursday of any industry on the index at 11.2 percent, edging out both Internet companies and computer hardware makers, according to data compiled by Bloomberg. The 269 biotech companies have been one of the biggest contributors to the Nasdaq’s gain, with a more than 500 percent return over the past four years, compared with 166 percent for hardware and 97 percent for Internet.
Buyers paid an average of 31 times revenue for $1 billion-plus drug deals in the past three years, according to data compiled by Bloomberg.
Before 2013, it was “very unusual” for a pre-clinical or phase 1 company to go public, said David Schechner, a managing director in life sciences investment banking. Yet in 2014, 10 did, compared with four in 2013. Those early stage companies might not have even considered selling stock a few years ago, he said.
Now there are signs that the biotech industry’s fortunes could change. One key measure of investor pessimism, the short interest ratio, has about doubled for the Nasdaq Biotechnology Index since 2013, according to data compiled by Bloomberg.
While investors have profited during biotech’s rise, the concern is that a handful failures in clinical trials -- which isn’t out of the ordinary in this industry -- could send investors fleeing. The last downturn followed a two-year boom that started in 1998 and saw the Nasdaq biotech index rise fourfold. When it crashed, it took a decade for investors to get excited again…
Biotech rally and short interest since Yellen’s “substantially stretched” call:
[6]
* * *
We leave you with the following quote from Carole Nuechterlein, head of the Roche Venture Fund, who had the following to say about a 100% move in shares of a pre-revenue biotech on its first day of trading:
“My initial reaction wasn’t, ‘Wow, this is great,’ it was more, ‘The end is coming.’”
