By Ben Levisohn
Credit Suisse analyst Ravi Mehrotra and team don’t think biotech stocks–including Biogen Idec (BIIB) and Celgene (CELG)–are in a bubble. He explains why:
Given the unprecedented performance in the biotech sector – are we in a “biotech bubble”? One thing is for sure – we are in a completely unprecedented times for the biotech sector: (a) Since 1/1/2011 the NYSE ARCA Biotech Index has delivered 204% performance vs. 64% for the S&P500. The NYSE ARCA Biotech Index is up nearly 400% since the previous peak reached during the mother of all bull markets, i.e. the dotcom fueled 1999/2000 frenzy. The cumulative market cap of the 5 large caps is $513B currently up from $128B at the beginning of 2011 (and $82B at the beginning of 2001); (b) Biotech was the top performing sector for the last 5 years – 2011-2015; (c) The number of IPO’s in 2014 (82 IPOs) has eclipsed the previous peak (67 IPOs) in 2000. There have been 12 IPOs YTD; (d) Multi $B valuations for SMID caps are now the norm. There are currently 44 public biotechs with >$2B market caps (outside the 5 large caps), 1 year ago there were only 26 and in 2011 just 14.
… we do not think we are in a “biotech bubble” per se (ok maybe the pendulum has over-swung a little!), but rather in a new era for biotech driven by fundamental changes in large and SMID cap biotech. Large cap biotech has evolved from a “Biotech 1.0″ to “Biotech 2.0″ business model and delivering industry leading growth rates and margins. Despite this, large cap biotech still trades at lower forward PE multiples (with higher growth rates) than the S&P500. The SMID Cap business model has also changed to an “owning the (potential) oil-well” from a “pick-and-shovel leasing for small royalties on any oil discovered” business model. The robust financing window has facilitated this. “Terminal value” of large caps and recent M&A premiums combined with “all the cool science” add to the perfect (good storm) for SMID caps.
Mehrotra calls Biogen Idec and Celgene “key stock picks” among large-cap biotechs.
Shares of Biogen Idec have gained 1.2% to $434.23 at 10:31 a.m. today, while Celgene has risen 0.9% to $118.73. The First Trust NYSE Arca Biotech ETF (FBT) has advanced 1.9% to $118.68.