The NASDAQ Composite is fast approaching its all-time high from March 2000. On Monday it reached 5,000 for the first time since the tech bubble.
Today's technology IPOs look much tamer in number than they did 15 years ago, but a boom in biotech IPOs raises concerns over a bubble in the biotech sector. While biotech IPOs have made an unusually strong showing since 2013, it is important to note that IPO investors are still discerning when these companies come to market; half price below the range and most of their gains are in aftermarket trading.
Beware the biotech bubble
• The NASDAQ Biotech Index is more than double its March 2000 peak
• The average biotech from 2013-2014 trades 78% above its offer price, over 3x that of non-biotechs.
• 71 IPOs in 2014 were biotechs, a level of activity never seen before.
• About 40% of 2014 IPOs were preclinical, meaning not even tested on human beings.
• About 25% of biotech IPOs were focused on oncology. They can't all cure cancer.
Ballast of the biotechs:
• Better science: We decoded the gene 15 years ago and now we're harnessing it, e.g. gene therapy, immunotherapy, etc.
• Smarter backers: We see dedicated biotech venture funds with their own panel of doctors
• Insiders buy more shares on the IPO, eating their cooking
• FDA lends a lifeline: Breakthrough designations are getting speedier approvals
Fifteen years ago, investors bet on technology companies with nothing more than a domain name and a concept. Fifteen years from now, there may be the biotech equivalent of Amazon and Google and a multitude of others like Pets.com and Webvan that will no longer exist. Out of the wreckage we could find that cure for cancer just as today’s connected economy was born out of the dotcom bust.
The Renaissance IPO Index, which is tracked by the IPO ETF, owns few biotechs but instead holds large health care names include Zoetis (ZTS), Quintiles (Q) and Envision Healthcare (EVHC).
