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.