Putting the biotech boom in perspective

Size alone is somewhat irrelevant in examining a particular market sector, says Bernstein's Geoffrey Porges, but at some point it needs to reflect future profit potential. The market value of the booming biotech sector has reached $582B, he says, putting the industry on par with chemicals, beverages, and heavy equipment manufacturers. Biotech is now worth more than the aerospace/defense companies and auto manufacturers combined, and is on its way towards the $600B+ territory of investment banks, semiconductor and related, and utilities.

Over the last two years, the value of biotech is up 128%, more than double the increase in pharma and medtech stocks, and 3x the growth in the overall market. In two years, biotech has added value greater than the total current value of the transportation industry, or of the metals mining industry, or of the auto industry.

Biotech's size along with the fast raising of capital (about the same as during the 1999-2001 boom) has Porges somewhat worried, and he thinks higher interest rates and a stumbling broader market could see the sector slumping up to 40%. His favorites to own are Celgene (CELG) and Gilead (GILD) because of strong cash flows and very low relative multiples.


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Comments (10)
  • karmaswimswami
    , contributor
    Comments (125) | Send Message
    I agree with Porges and am long CELG and GILD. These are such powerful and astute organizations that people need to realize that they are controlling the debate in their target areas, that academia and the FDA and the market are following their lead, not the other way around. And they have shown, and continue to show, that they have the wherewithal to lead.
    24 Feb 2014, 01:19 PM Reply Like
  • ajax133
    , contributor
    Comments (402) | Send Message
    I appreciate your comments. One significant point missed is the significant
    increase in productivity in the Biotechnology sector. Before this relatively new sector; about 40+ years old, matured, the success rate of Biopharma's NDA's was at best, fractional to it's current success rate. Companies focusing onRare Diseases and new Oncology products bode well for both the sector and these Co's. (like ALXN, GILD, and CELG), as these well managed firms have their IP firmly focused on Oncology. Hep C. and rare diseases with excellent pricing power and reimbursement. Though the NBI is well extended above it's 200 day moving average some minor correction is most likely, which I feel would create a buyingopportunity. The only unknown is the sustainability of reimbursement with thecurrent occupant in the Oval Office.
    24 Feb 2014, 02:19 PM Reply Like
  • bellweather1
    , contributor
    Comments (14) | Send Message
    I can appreciate the implications of this article in broad terms, and I'm sure the volatility we've seen will continue because of the risks inherent in rapid growth in a field where most investors knowledge is relatively superficial. However, by and large, I think this growth has a long way to go for 2 predominant reasons:


    1) the demographics of industrial populations, that will continue to need the products that only biotech, in so many cases, is able to provide.


    2)the maturation our understanding of the human genome continues to increase our awareness of new, more effective targets in such a wide range of disease types, that we're beginning to see real clinical solutions and benefits where none existed-as a result many death sentence diseases will be converted to chronic ones, and this will ultimately support the dramatic increases in value within the sector that produced them-namely biotech.
    24 Feb 2014, 04:33 PM Reply Like
  • Heem
    , contributor
    Comments (239) | Send Message
    The wild growth in this sector had me concerned that a market correction would really hit Bio Tech stocks hard. I'm not a fan of frothy markets and would like to see a correction of 10% - 20% before getting in.
    24 Feb 2014, 05:02 PM Reply Like
  • cleung918@yahoo.com
    , contributor
    Comments (6) | Send Message
    I look for great advancements in wireless, biology and medicine in the near and long term. They will contribute greatly to communication and health/wellness. Great research has been done and it is up to good companies to look for applications and to continue in ever expanding areas for research.


    I also hope these companies riding their successes will look for ways to benefit the greater general public. No too many people can afford spending $100,000 on a particular drug to fight rare diseases which have no racial or wealth boundaries.
    24 Feb 2014, 05:18 PM Reply Like
  • bellweather1
    , contributor
    Comments (14) | Send Message
    Heem, that has been the mantra of so many people in all markets, not just biotech... But frothiness, to my mind, is in the eye of the beholder, and should only be evaluated in comparison to the other alternatives.


    Current broad market levels (at approx. 16xs) continue to provide a preferable alternative to most fixed income alternatives. Biotech, which by it's very nature, is a speculative domain, is always priced far above the general market. But, unlike the dot com era, valuations by and large still bear some relation to future earnings potential-however, determining which COs warrant these higher valuations and which are essentially just over-hyped is the responsibility of the individual investor-i.e.perhaps more so than any other sector, it is a stock pickers market.


    Bottom line, therefore, is that despite corrections, this sector will remain "frothy" by any conventional standards. Nevertheless, COs that warrant lofty valuations will continue to advance, so don't expect global sector corrections to provide you with entry points because by the time these occur, the stocks you should want to invest in will be that much more expensive.
    24 Feb 2014, 08:24 PM Reply Like
  • Heem
    , contributor
    Comments (239) | Send Message
    bellweather1 - Thanks for your perspective. What is your view of the sector ETFs or funds like FBIOX vs individual stocks and are these buy and hold like a KO or XOM.
    25 Feb 2014, 08:54 AM Reply Like
  • bellweather1
    , contributor
    Comments (14) | Send Message
    Some sector funds probably are. But as I already stated, biotech, in particular, is a stock pickers market, so I favor(and only own) individual stocks. I guess post dip, a fund analogue of the IBB would be a good investment long term.
    25 Feb 2014, 01:24 PM Reply Like
  • richbar
    , contributor
    Comments (1126) | Send Message
    Biotech is the future in medicine. The $582 billion market cap of this sector doesn't scare me. After all, Apple alone has a market cap of $470 billion.
    25 Feb 2014, 09:01 AM Reply Like
  • mapgirl
    , contributor
    Comments (46) | Send Message
    Important to remember: Most Biotech companies fail to achieve a marketable product. Most small biotech's will lose you money. Everyone is hoping for the next Celgene.
    27 Feb 2014, 09:33 PM Reply Like
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