Why biotechnology is brewing a big bubble

Annabelle Williams
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THE dot-com bubble of the 2000s is remembered as a period of mania, when investors cast aside time-honoured principles of how to analyse corporate health. In a kind of mass hysteria, sensible metrics such as sales, profit growth and cashflow were cast aside, and the market went bananas for fast-growing firms with plans to change the world – many of which had no profits and were burning through cash at an incredible rate. The tech-heavy Nasdaq index rose dramatically, and young companies listing on the market drew in vast sums of money.

The bubble burst, lessons were learnt... And now there is a new pocket of rapid growth which is drawing parallels with the dot-com industry.

There has been an explosion of interest in biotech firms developing next-generation medicine, including stem cell therapy, immuno-oncology, therapeutic proteins, and regenerative medicine. The Nasdaq Biotechnology index has risen over 650 per cent in the last ten years. This figure mirrors the rise of the technology-dominated Nasdaq index in the 1990s, where shares grew 500 per cent, taking the market from a level of 1,000 to 5,000.

Professional investors live in hope of spotting opportunities before everyone else, and the current wave of ingenuity in medical science could undoubtedly revolutionise medicine.

The trouble is, this revolution may still be ten years away. This was the crux of the dot-com bubble; investors got behind the “new economy” long before it took off. Adoption of the internet was a pivotal moment for society and the global economy, but when shares in dot-com stocks were soaring, culture had yet to fully adapt. And dot-com companies had yet to effectively monetise their products. One day, the tech giants would indeed make a fortune, but this was not in the 1990s.

The rapid rise of biotech shares has prompted a debate about whether these companies are being appropriately valued. Three-quarters of the 148 biotech firms in the index have no profits at all, and just five companies account for more than 80 per cent of the whole sector’s earnings.

Some biotech firms are well established and are akin to big pharmaceutical companies. But over the last year there has been a string of record-breaking initial public offerings (IPOs) in the sector, with $6.3bn raised for early stage companies – many of which hope to bring their innovations to the consumer, but have their drugs stuck in second-stage trials. Gene therapy firm Spark Therapeutics, for example, raised $160m at its IPO in January, and has only one “product candidate” in late-stage trials. Ascendis Pharma raised $108m and is aiming to continue trials of its growth hormone treatment. This is just a snapshot.

Criticism of the sector’s rise has come from high places. Federal Reserve chair Janet Yellen highlighted biotech as one area where valuations look “stretched”. Last month, legendary investor Neil Woodford said there were “pretty punchy” valuations in biotech, adding he was most uncomfortable with early-stage firms across the Atlantic.

Biotech’s meteoric rise may not just be down to hopes of a new dawn in medicine. As with all areas of investment, it could be a result of central bank liquidity programmes. There is just so much money sloshing around, looking for a place to invest.

In recent weeks biotech stocks have begun to fall in price. Whether this reflects a natural spell of profit-taking or the start of something bigger remains to be seen. But with a chorus of voices calling “bubble”, times may become much tougher for the biotech fledglings.

Annabelle Williams is deputy money editor at City A.M.

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