After an epic four-year run, biotech stocks continue to do great. The iShares Nasdaq Biotechnology Index (IBB) is up over 20 percent year-to-date, once again thumping the S&P 500. Repeated calls that the end is nigh have been wrong so far.
But that doesn't mean there couldn't be something terrible in store. Buzz about a biotech bubble continues to build. I said back in January that I think the period we're in is more likely to look like 1996—a period of slower growth and consolidation before further gains. I still believe that, but so far we're seeing few signs that things are slowing down. Was I too pessimistic? Too optimistic? Let's look at a few reasons to think that this is not a bubble.
1. There is so much money left around. Biotech raised $8.6 billion in venture capital in 2014, according to PricewaterhouseCoopers, marking the highest level since 2007. Still, considering the epic run biotech has experienced, this bump up hardly has the earmarks of a bubble—and moreover, the number of companies getting funding has remained relatively stable over the past decade.
In fact, the amount of money flowing into the biotech sector—from VCs or other sources—pales in comparison to the amount of cash sitting on pharma balance sheets. Just look at the chart below (taken from the LifeSciVC Blog). Major pharma companies have stripped down their R&D, they still need assets, and they plan to get them from biotech—through partnership, M&A, or investment. As Bruce Booth at LifeSciVC Blog put it:
"Assume these Big BioPharma companies channeled just ~five percent of their balance sheet cash (roughly the 'draw' on a typical 'endowment') into private biotech companies—this capital flow would fully fund the entire VC-backed biotech sector for a year (~500 companies)."
2. The market is getting more discerning rather than more frantic, which is a good sign. For instance, the wild enthusiasm over cancer immunotherapy in general—and CAR-T technology in particular—hasn't caused investors to lose their collective head. Cellectis, which recently went public touting its gene-edited CAR-T technology, has dropped from its IPO price. Aduro BioTech, which just went public this past month and is partnered with Novartis on cancer immunotherapy, got a much different reception. Investors are distinguishing technologies and strategies.
Indeed, of the 13 biotech IPOs in 2015 year-to-date, the average gain is about 28 percent. But there's a very big range within that—six of 13 are actually in negative territory, while most of the gains come from just two companies, Spark Therapeutics, which went public at the end of January, and Aduro.
3. High valuations are supported by M&A. This isn't just about fund managers or (worse yet) retail investors bidding up companies based on sheer momentum or unbridled hopes and dreams. Big pharma companies are paying a premium to supposed bubble prices for the right strategic assets. That's real money.
4. Scientific advances are real. It's one thing to buy into the hype around exciting but unproven concepts. But there have been advances since the biotech bubble of 2000-2001 that would have looked like science fiction a decade or so ago. There are real cures for hepatitis C. Cancer immunotherapy is real, making an amazing difference in melanoma and blood cancers. Other therapeutic approaches, from RNA drugs to gene therapy, are producing impressive data and look as if their commercial potential is right around the corner.
Meanwhile, approved drugs have driven huge new profits at established companies, so rising stock prices don't always mean stretched valuations. It's hard to argue that, say, Gilead Sciences is suffering from a bubble valuation right now. While many biopharma companies do rely on price increases to drive growth, that points to another strength: They have the power to command price increases. Until that changes, this remains a very attractive business in which the barriers to entry are high but the rewards are enormous.
5. The regulatory environment is working better. There were 41 novel drug approvals in 2014, the second highest total ever, behind the 53 approvals in 1996. But those 53 approvals might not even be a fair comparison, coming as the result of FDA using its new user fee authority to clear out a huge backlog of pending applications. Moreover, there has been a pronounced shift from small molecules to biologics since then. Drug discovery and development has gotten harder and more expensive, but the advances and technologies that whipped the market into a frenzy 15 years ago finally appear to be bearing fruit.
6. Many people are convinced there is a bubble and the press keeps going on about it, which suggests that maybe there isn't. In a FierceBiotech poll from late March, a survey of 656 readers were pretty evenly divided but came down on the side of there being a biotech bubble right now, 52 to 48 percent. Meanwhile, although the concept of a magazine cover is probably an anachronism, when the press trumpets something about the market, it's often a contrary indicator. Writers can't shut up about the biotech bubble, from the Wall Street Journal to Business Insider to Bloomberg.
7. The biotech bubble already popped. Remember that big setback in March? No, I don't mean the drop from a few weeks ago. I mean March 2014. That's when the air came out of pretty much the whole sector. Sure, a lot of companies recovered and went on to new highs. You know which ones didn't? The speculative companies without much in the way of robust data or near-term product revenue. Even a company like Celldex Therapeutics, which has since produced some pretty stunning data in advanced glioblastoma, is still trading below where it did in early 2014, before the data release. Sure, there are contrary examples to this, but this is still an indication that the market has become more discerning over the past year.
None of this means that biotech will keep performing like it has been--I doubt that's the case. But in the neverending struggle between greed and fear, there are at least some good reasons to stay courageous.