There Is No Biotech Bubble; Here's the Real Story

Email

Some analysts feel that the biotech sector's recent tumble is evidence of the biotech bubble bursting.

Biotech bubble

But they're wrong; the market is simply in a period of adjustment.

The premise behind the bubble idea is that biotech companies as a group are overvalued, that their market caps aren't supported by performance. In other words, that their perceived value is all smoke and mirrors.

The problem with that argument is, these analysts are using a mass of technical indicators to support it. Anyone who's followed start-up biotechs knows that's a fool's errand.

Why?

Because most of these companies won't turn a profit for years, and no one expects them to. Their job in the startup phase is R&D, not market performance. The only really meaningful financial indicator of a young biotech's health is its negative cash flow – how fast is it burning through money, and does it have enough cash reserves to keep the lights on for a year or two?

The fact is, a pre-profit biotech's valuation is based solely on our expectations for its future performance. And we form those expectations on the quality of the drugs or devices it is developing insofar as they help safely cure or manage disease or injury.

A bubble happens when speculators put a lot of money into assets that have no fundamental value. Like the dot-coms – anyone could put together a website and open an office with a chair, a desk, and a computer, and people would invest their hard-earned money into it. How about real estate? The properties were real, of course, but the instruments used to finance them, the mortgages, were fundamentally flawed.

That is not the case for bioscience companies. These firms develop and hold important intellectual properties that have real value. Some will succeed, and many will fail. But they will do so individually, not as part of some overall momentum in the sector.

There is no bubble. Not all boats are rising. It's true that the sector, on average, had a remarkable growth year in 2013, but that's because a select group of biotechs had super-success, even while others floundered, and their numbers inflated the mean.

So if it's not a biotech bubble bursting, what's going on in the sector? Why have stocks been moving downward over the past couple weeks?

Join the conversation. Click here to jump to comments…

About the Author

Ernie Tremblay has over 20 years' experience studying and writing about the latest developments in health, medicine, and related technologies. He understands the FDA approval process, the "hard science" behind these drugs, and the market demand for them, better than almost anyone else on earth. He has mastered the complex dynamics that determine whether a new drug will be a breakthrough winner - or just another casualty of the FDA approval process.

Read full bio

  1. Jeff B | April 17, 2014

    I believe the reason biotech stocks are getting hit is because the govt (medicare) and eventually the other insurance companies do not want to pay the prices for these drugs and will eventually cause the prices and thus profits to fall
    All part of the Obamacare scheme and ensuing debacle

Leave a Reply

Your email address will not be published. Required fields are marked *


× 3 = twenty four

Some HTML is OK

© 2014 Money Map Press. All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning. 16 W. Madison St. Baltimore, MD, 21201, Email: customerservice@MoneyMorning.com