The biotechnology industry is reaching record highs. Some companies have speculated values multiple times higher than their current values. These highs bring in more investors, which is leading to the speculation that the industry could be nearing dangerous bubble territories.
A bubble in the economy is when one sector or industry has a large amount of success, and this success draws in more investors who then continually increase the value of the sector. This will repeat until people realize that the sector is overvalued, and then people start to sell. This leads to a sharp downward trend. Bubbles like these have been seen again and again, most notably the housing and mortgage bubble that lead to the financial troubles in 2008.
The biotech industry is made up of mostly start-up companies whose drugs have great potential. This industry is filled with risk, however. This is due to all the steps that a company must go through to get its drug into the market. The company must do a trial, get approval from the FDA and then be successful enough to pay off the debts that the company has taken on. If the trial fails, the FDA does not approve the drug or funding runs out, the company’s stock will plummet. However, if a company can maneuver its way through these issues then its stock is sure to grow to even higher levels.
The biotech industry has the best rate of return in the NASDAQ. According to Bloomberg, the NASDAQ has grown 27 percent due to the biotech sector. Gregory Zuckerman of The Wall Street Journal says that this increase is due to “heady earnings growth, more approvals from the Food and Drug Administration and investor enthusiasm for a range of new biotech drugs and potential treatments.” Another reason that the industry has been doing so well is a large number of initial public offerings on new companies that are entering the industry.
Some companies have had their valuations upped by over 30 percent in the last year due to these booms. With many investors thinking that interest rates will soon increase, it will be a mystery as to whether this bubble is going to pop. However, some investors think this is just the start of the boom. One investment manager stated in The Wall Street Journal that “there are so many exciting areas and there are good reasons investors are getting excited about biotechnology companies.”
March 27, 2015.