Is the biotech boom over?
Stocks in this sector are up less than 4% this year after torrid growth over the previous 2 years.
Quite the opposite: Biotech innovation is funded in great part by investors whose timing is wrong, and who get left holding the bag at the end of the sector’s inevitable boom cycles, only to have some of the companies, products, and technologies they bet on succeed later on.
The biotech boom has been fueled in part by fundamentals: stunningly lucrative new drug launches and research breakthroughs. But some investors seem to be seeing rainbows and missing the rain. Here are three things I've heard from investors and executives, or seen in the invaluable polls of buy-siders run by ISI Group's Mark Schoenebaum, that I think are misplaced optimism.
The whole drug industry -- and biotech companies are separated from larger drug companies by distinctions of business model, not fundamental science -- has been caught up in what has coyly been termed "Eroom's law": The amount of R&D money sunk per molecule is rising exponentially.
There's no proof that this multi-decade trend has abated. Geoffrey Porges, an analyst at Bernstein research, recently looked at the drugs in development at large biotechnology companies such as Celgene (CELG) -- the best-performer over the past year -- Gilead (GILD), and Biogen Idec (BIIB).
He points out that many of these firms R&D successes have actually been "derivative" products based on approaches that were already known to work. Celgene's success has come through drugs derived from its original success, repurposing thalidomide as a treatment for multiple myeloma and from Abraxane, an improved version of the 1990s cancer drug Taxol.
Biogen's big hit, Tecfidera for multiple sclerosis, is a new formulation of a drug that had been used to treat psoriasis in Germany. Porges points out that Celgene is now betting on a new first-in-class molecule, sotatercept. And Biogen's big event this year will be data for its anti-LINGO program, which is a brand new way to treat multiple sclerosis. He says Alexion and Vertex are likely facing longer odds than they have in the past. Drug research: It's really, really hard.
This kind of thinking is dangerous, and I say that having fallen into the FDA-got-easier-trap several times myself -- and been wrong. There was a period, starting a decade ago, when the FDA, normally relatively friendly to industry, became unusually negative because there were a lot of drug safety controversies, including those over the pain medicine Vioxx and the antidepressant Paxil.
Regulators who were afraid Congress would go after them were noticeably more reticent to approve drugs. And there has been movement to make the FDA bureaucracy easier to manage, particularly with the creation of the "breakthrough" designation for important drugs. And in cancer, in particular, where there are more drugs in development than in any other disease area, the FDA does seem to be working more closely with companies.
Regeneron and partner Sanofi have several potential blockbusters in their shared pipeline, including not only their PCSK9 cholesterol drug but medicines for rheumatoid arthritis and asthma. Personally, I think Vertex's combination therapy for cystic fibrosis could show positive results later this year. There are always going to be good biotech stocks to pick, even in the worst market. A breakthrough drug remains one of the most profitable products you can ever sell, and it will for the foreseeable future -- maybe as long as there are sick people.
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These hot movers could rise by double digits in coming months.
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