Biotech's Growth is White-Hot, But Analysts Urge Caution

Published: Jun 23, 2015

Biotech's Growth is White-Hot, But Analysts Urge Caution
June 22, 2015
By Riley McDermid, Breaking News Sr. Editor

Biotech is continuing its scorching pace of growth, with the NASDAQ Biotechnology Index (NBI) up more than 25 percent this year, 34 percent year-over-year, and more than 520 percent since 2009. That’s led some investors to wonder if these new highs are the new normal—and where the market might be frothiest.

Indeed, almost every week in 2015 has seen a significant gain for the NBI, with Friday’s trading ending with the sector up almost 4 percent, a vast outpacing of the NASDAQ Composite, which only gained 1.3 percent. But there remains a tug-of-war on consensus between the buy side and the sell side about valuation, which a recent polling by ISI Evercore found to be somewhat over-hyped.

“We recently calculated the market cap/EV for the entire biotech sector. We also gathered consensus estimates for the entire sector. We then asked the question: ‘What's the present value of total biotech sector cash flows that consensus estimates predict?’" wrote Mark Schoenebaum, an analyst at ISI Evercore, in a note to investors Monday.

“The answer is that it's far above where the sector is currently trading,” Schoenebaum said. That likely means the buy side believes the sell side is overvaluing the sector, for a variety of reasons.

“I would note that consensus estimates currently show biotech revenue growing by a whopping [around] $90 billion by 2019. So perhaps it's healthy that you don't seem to believe this. (Argument for no bubble?),” wrote Schoenebaum.

One factor might be that the sector’s highs have simply been historic, which has buoyed the market overall.

“The last nine months has been a series of higher highs” for biotech stocks, Brian Lazorishak, portfolio manager of the $102 million Chase Growth Fund, told the Wall Street Journal last week.

Indeed, the top biotech ETF, the iShares NASDAQ Biotechnology Index (ETF) surged to an new all-time high last week, gaining 3 percent intra-day for its nearly $9 billion in total assets. Since its basket follows well-known sector bellwethers like Amgen and Gilead Sciences, Inc. , analysts and investors watch it closely for signs of any market hiccups.

Still, for now, some analysts believe that while it’s been great while it lasted, that level of growth will eventually become impossible to sustain long-term.

“By our math, the sector's cash flows have to grow 4 to 6 percent into perpetuity in order justify the current market cap/EV,” said Schoenebaum. This is in contrast to consensus estimates, which appear to imply much higher cash flow growth.”

As Rumors Swirl About GlaxoSmithKline Bid, Who Could Suitors Be?
Rumors are swirling that Swiss-based Roche and U.S.-based Johnson & Johnson are eying the U.K. company for approximately $143 billion. But Roche and J&J aren’t the only companies though who have been thought could go after the elephant that is Glaxo.

Last month there was buzz that Pfizer Inc. was considering acquiring Glaxo, a year after it failed to acquire AstraZeneca PLC . Just this month over a third of respondents in a poll conducted by BioSpace believe that AstraZeneca PLC could be in the running to acquire struggling GlaxoSmithKline (GSK).

So BioSpace wants to ask our readers again what they predict for this new dealmaking bonanza. Will Glaxo go—and if so, to whom?

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