I actually think it is a bubble – but a bubble that does not need to “burst” so to speak; one that can mature and begin to justify itself over the coming decade.
With aging populations accelerating across Europe, Japan, China and the US all at once – combined with the burgeoning middle class customer in the EM and its coming gentrification – the market for therapies and drugs is going into overdrive. This is probably why biotech stocks are selling at a 60% premium to the S&P 500 – double their already-rich historical premium.
The question, as always, remains the same – is it different this time? What has changed and are these changes permanent? Do these changes demand us to alter our way of thinking? Usually the answer is no, but sometimes it’s yes.
Here’s a very smart young blogger I’ve known for a few years, Elliot Turner, with his vociferous defense of the space and its current excesses (emphasis mine)…
The problem for biotech is that its impact is very intangible compared to the Smartphones we all carry in our pockets everywhere. Genomics has greatly accelerated the process and efficiency of drug discovery. The results are evident, though people don’t see or feel it. In 2012 new drug approvals by the FDA hit a sixteen year high. Although 2013 did not see a new high in approvals, it did see the largest aggregate market opportunity for new approvals. I will oversimplify to make the point very clear: let’s say the average drug development timeframe was 10 years and has now accelerated to 5 years. Drug development inherently becomes worth more money if the time to earning first cash flows is cut in half.
If you’re an investor or an enthusiast, you should read this: