With the Nasdaq Biotechnology Index hitting record highs, Motley Fool health care analyst Max Macaluso and Fool contributor Brian Orelli sat down to chat about whether we’re in a biotech bubble. Their conversation follows:
Brian Orelli: There are a couple of biotech indexes: the AMEX Biotech index (^BTK) and the Nasdaq Biotechnology Index (^NBI). And then there are some ETFs that track those funds or another basket of companies they’ve created, the SPDR S&P Biotech (ETF) (NYSEARCA:XBI), iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB), and First Trust NYSE Arca Biotchnlgy Indx Fd (NYSEARCA:FBT)for example.
I think most people follow the NBI or the iShares ETF that tracks it.
Macaluso: The Dow Jones Industrial Average is hovering near an all-time high. Is the NBI also hitting record highs?
Orelli: It just hit a record high, but we have to go further back than 2007 — the last time the Dow was at an all-time high. The NBI was at this level back in 2000. Like the dot-com bubble, the biotech bubble burst, and it’s taken us this long to recover.
Macaluso: You’re drawing an eerie parallel here… do you think we’re in another biotech bubble right now?
Orelli: I don’t think we’re in a bubble. I was still in grad school during the last one, so I wasn’t covering the sector as closely as I do now, but I remember the euphoria for biotech. In contrast, I don’t think valuations are over the top today.
Keep in mind that overall value should go up over time. Companies are pumping billions of dollars into R&D. That should be creating more valuable companies. If it isn’t, we have a problem.
Macaluso: So if valuations across the industry aren’t inflated at the moment, what’s behind the biotech industry’s incredible run lately?
Orelli: The index has run up in large part because of a couple of key components that make up a large portion of the index.Regeneron Pharmaceuticals Inc (NASDAQ:REGN) for instance is over 8% of the index. Its macular degeneration drug, Eylea, has been selling better than investors — and the company for that matter — had expected. Shares are up over 50% over the last year.Gilead Sciences, Inc. (NASDAQ:GILD) has almost doubled over the last year as investors have high hopes for its hepatitis C franchise.
That’s the thing about indexes. There are 119 companies in the NBI. Euphoria for all the little guys can move the index, but so can monster moves by a few of the big companies. Those might be overvalued now — it depends on whether Regeneron can develop more drugs and, for Gilead Sciences, Inc. (NASDAQ:GILD), whether the hepatitis C market is as large as people think it is — but even if they fall a little, we won’t have a bubble burst like we did in 2000 when the index fell 70% over the course of two years.
Macaluso: Regeneron and Gilead Sciences, Inc. (NASDAQ:GILD) are two of the biggest biotech success stories from last year, but what about the losers in this industry? When a small biotech with one drug in development receives an FDA rejection, for instance, it can lose 80% or more of its value overnight. How do cases like this affect the NBI?
