Biotech bubble may just be an optical illusion

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Biotech bubble may just be an optical illusion

iCELL News

March 27, 2015

Sector

SAN FRANCISCO (MarketWatch)—The stellar performance of biotechnology stocks in the past few years has predictably sparked fears of an impending crash. But for all the talk of a bubble, biotechs are far from being overbought, according to analysts at Credit Suisse.

“There are optics suggesting that we are in a biotech bubble,” wrote Ravi Mehrotra at Credit Suisse in a note to investors on Friday.

Biotech was the best-performing sector between 2011 to 2014 and the NYSE Arca Biotechnology Index BTK, +2.76% rose 204% since January 2011 versus the S&P 500’s SPX, +0.10% 64%. The combined market cap of the top five biotech companies is $513 billion, quadrupling from $128 billion in 2011.

But a multiyear rally does not a bubble make, according to Mehrotra.

“Yes, we are in unprecedented times with regards to performance, interest levels, valuations of SMID caps but we are also seeing unprecedented success in the sector—success that is fundamental and long-lasting,” he said.

At the core of Mehrotra’s analysis is that the biotech industry business model has changed and evolved over the past three years from Biotech 1.0 to Biotech 2.0.

“Biotech 1.0 is the ‘Hopes And Dreams Model’— make great drugs for unmet medical needs and sell them thus creating a unique infrastructure.”

Biotech 2.0 is the “Nirvana Model” where companies develop next-generation blockbuster drugs that bring with it record growth and profitability.

“Biotech 2.0 not only delivered exceptional top-line growth that was further leveraged to even higher bottom line growth but a massive improvement in operating margins,” he said.

Biogen Inc. BIIB, +0.88% Gilead Sciences Inc. GILD, +0.38% and Celgene Corp.CELG, +1.44% are prime examples of companies that successfully adopted the Biotech 2.0 model, he said.

Aside from a fundamental shift in the industry, he also claims the “cool” factor of gene therapy, stem cells, and cell engineering—along with new scientific discoveries make these technologies “drug-able”–will fuel greater investors’ interest in biotech stocks.

Mehrotra said he believes biotechs must dominate in their chosen fields to sustain the upward trajectory. “We view domain domination as the best pathway for yielding the highest chances of post 2020 growth.”

Among large caps, Biogen and Celgene are almost on the verge of domain domination while small-cap names that bear watching are Celladon Corp.CLDN, +2.68% Ironwood Pharmaceuticals Inc. IRWD, +1.36% Ovascience Inc.OVAS, -10.52% Esperion Therapeutics Inc. ESPR, +3.51% PTC Therapeutics Inc.PTCT, +4.58% and Amana Takaful PLC ATLN, +0.00%