Biotech and Pharma

When does the biotech party end?


It's been a good few years for biotech, to make a bit of an understatement. The Nasdaq Biotech Index is up 177 percent in the last three years, compared with a 52 percent increase for the . Last year saw a record number of IPOs, blowing out even the bubble year of 2000.

This week, a record number of health-care companies (10) are planned to go public on the Nasdaq. And biotech companies raised $2.6 billion in offerings last week, according to RBC Capital Markets analyst Simos Simeonidis.

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"Imagine if I'd said to that to you in 2010, that in 2015, we'd have a week with $2 billion in new equity issued," Mark Schoenebaum, an analyst with Evercore ISI, said in a Jan. 23 video to clients. "And the stocks, as best I can tell, are all up or flat on that; it wasn't done on onerous terms."

So many investors may be wondering … when does the party end?

Pedro Castellano | Getty Images

"What concerns me is that nobody's concerned," Les Funtleyder, portfolio manager with E Squared Asset Management, said in a telephone interview. "In general, valuations have gone up quite a bit. We've seen a lot of good clinical results. But this is biotech, and there's a lot that can go wrong."

The sheer volume and pace of offerings in the sector are causing some to question whether biotech's nearing the end of its years of buoyancy.

"The fact that there just seem to be companies I've never heard of appearing every day, I think it's not surprising given the amount of capital that's being put to work," Brian Skorney, an analyst with Robert W. Baird, said by telephone. "I think it could also be considered a little concerning."

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Skorney noted that, with so much money flowing into the sector, investors may not be doing the same amount of diligence on each investment as they would have three or four years ago.

"Personally, I think the IPOs are a little scary in terms of the valuations," he said.

But optimism in biotech abounds. Of 18 chief executives in pharma and biotech interviewed by CNBC at the this month, only two said the sector is in a bubble. And all said it's likely to outperform the broader market this year.

What's behind that? The same trends that have been driving biotech for the last few years: a record number of new drugs approved by the Food and Drug Administration in 2014, improvements in technology (particularly in genome sequencing, expected to be a large part of President Barack Obama's recently announced precision medicine initiative) and low interest rates, which help drive acquisitions, analysts said.

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"If you have low interest rates, that means cost of capital is relatively cheap," said Funtleyder. "It encourages M&A on the part of large pharma because they're not getting any money on their money, so they may as well put it to work."

Would-be acquirers, though, including Pfizer CEO Ian Read, have noted valuations in some sectors are high.

"The starting points of the prices are somewhat buoyant, shall we say," Read said on Pfizer's Jan. 27 earnings call with analysts. "That does give you some concern when you look at the prices or premiums you need."

Yet deal activity through 2014 was hot, with companies from Idenix to InterMune to Cubist being snatched up at multibillion-dollar prices.

And, noted RBC's Simeonidis, even the boom in offerings last week looks more tempered when one considers half the capital was raised by just two companies: BioMarin and Alnylam.

"There is always great demand for high-quality companies," Simeonidis said in a telephone interview. The fact that many IPOs are still oversubscribed makes him believe the momentum will continue, he said.

"At some point there's an overabundance of offerings," Simeonidis said. The question is: When do we get there?