Back in the late months of 1999 buzzwords were abound. Valuations for tech startups were at unheard of levels and very few, if any, generated anything even resembling a profit. This was unusual for the free markets and there was one buzzword that rang particularly load and was the universal excuse for the high valuations; it was a new paradigm. Fast forward to 2015 and there may be a bubble forming of the magnitude seen in the past. The biotech segment is quickly becoming a reminder of that time. High valuations with no future product developments are starting to make the industry resemble that period back in early 200.
Huge Capital Influx
There has been a recent spate of speculative dollars being invested in small biotech and many of those companies have failed to produce even one marketable drug. This has been created by large companies that have existing patents expiring with no new products ready for market and very few new ideas. As R&D costs escalate, it is more prudent to look outside their own offices for new ideas. While the biotech sector has risen to extremely high valuations, there is little in future value to substantiate it and that could be the basis for a biotech bubble.
In 2014 there were 102 health-care IPO’s in the US. 71 of those were biotech’s. The previous record was in 2013 when 47 biotech’s went public. This is much higher than in the 2000’s when so many tech startups went public. Their valuations soared and there were no profits to justify the high PE’s and extreme valuations given them by analysts. The same may be happening with the sector and if it proves true the crash will be intense. As more and more dollars are pumped into these smaller companies the expectations rise and in turn patience wears thin. At what point it capitulates is the big question. At some point valuations need to be realistic when compared to future earnings.