Biotech stocks have had a huge run in recent years. The Nasdaq Biotech Index is up about 240% since the end of 2011, compared to the Nasdaq-100 tech index, which is (only) up 82% in that same period. Biotech shares on the Nasdaq are currently trading at nearly 50 times their earnings, compared to the overall Nasdaq composite’s P/E ratio of 27.5. Biotech firms have soared in value, as Gilead Sciences ($152 billion) and Amgen ($127 billion) have risen about 40% in the past 12 months. Biogen ($108 billion) has increased by 47%, and Celgene Corp. ($99 billion) has climbed 75%.
The biotech sector is certainly expensive right now, as earnings growth and increased approvals from the FDA has fueled this recent surge. These stocks, however, can be risky for investors, as they can suddenly plummet if funding runs out or a drug trial fails. The recent successes of the biotech sector seems like another sign that low interest rates are causing investors to take excessive risks. Some investors are becoming wary, however, as a flurry of IPO’s of biotech companies over the past few years heightens concerns that these firms may be trying to cash in on investor excitement in the sector, at the expense of the shareholders. While this surge for Biotech stocks is well below the valuations that Nasdaq tech stocks saw in 2000 when the index traded at a P/E at well above 100, this is certainly cause for wariness, if not concern.
http://www.bloomberg.com/news/articles/2015-03-06/these-investors-think-there-s-a-biotech-bubble-that-s-about-to-burst
2 Comments
Certainly the NASDAQ’s performance today marks a quite noticeable retreat from its all time high. Tech prices seems a little more reasonable than Biotech at the moment, and a pullback in the latter certainly seems welcome anytime now. That said, much of the biotech boom of the past couple years has been justified – better management and new drugs have undoubtedly led to serious FCF generation among biotech firms. However, the question always remains over when things have gotten to hot. Whether in one month or ten, we seem fated to experience at least a 10% biotech correction for one reason or another.
If growth remains low, as a result of low productivity growth and demographics, then (real) interest rates will remain low. If so, stock prices will remain permanently higher. However, a P/E of 50 is extreme — what sort of drugs do investors think these firms make?!
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