Back in April 2011, at a biotech conference in San Francisco, a panel convened to discuss how hard it was to build biotech companies that could push through long, costly clinical trials before a drug comes to market. One panelist hedged to say, well, at least the financial reticence had a silver lining: there was no danger of a bubble. Biotech venture veteran Camille Samuels responded, “Hey, I’ll take a bubble!”
Those were lean times. The biotech VC shakeout had begun, the IPO window had reopened only slightly after the global financial crisis, and several VCs were scrambling to invest in ways that would require less capital, even if it meant less reward for success.
From there, however, it took all of two years for observers to wonder if Samuels’ wish had in fact come true. In mid-2013, one biotech journalist wrote that “talk of a bubble is, well, bubbling up, and one wonders if it will pop in the summer heat.”
Nice call, pal. I wonder who wrote that? To be fair, I wasn’t the only scribe to float the B-word that year and mull the inevitable end. After all, it’s better to hedge with a little skepticism than get caught with your Dow-36,000 pants down.
Stocks will rise and fall, of course, and exuberance, rational and otherwise, will come and go.
“There will always be reasons underlying investor sentiment for one sector being hotter than another,” says Ernst & Young’s biotech consulting practice leader Glen Giovannetti. “It can’t be like this forever.”
Certainly not. The whiff of overweening effervescence is always nigh.
But I want a new metaphor. Why does a bull run like biotech that has been on since the start of 2012 necessarily presage a sobering pop? Think, perhaps, of a feather dropped out of a window instead of a bubble stretched to its maximum. In other words, when the inevitable correction comes—and far be it from me to try and predict when or why—there are signs the sector is strong enough to make it a gentle one.
Resilience. The two major biotech indices have risen more than 240 percent since the beginning of 2012. I won’t argue that nothing can happen to reverse the trend. Quite the opposite: In January, just before this year’s annual J.P. Morgan Healthcare Conference, I identified five factors that could trim biotech’s sails this year.
But it’s remarkable how the sector has absorbed what first seemed like body blows to little ill effect. It’s starting to feel like a big reversal—a bubble pop instead of a slow, feathery descent—would require severe external pressure, like another financial downturn that had little to do with the sector’s fundamental health.
Let’s recap some of last year’s resilience. In March, Congressman Henry Waxman (D-CA), a prominent drug-industry critic, took Gilead Sciences (NASDAQ: [[ticker:GILD]]) to task for the price of sofosbuvir (Sovaldi), a breakthrough in the treatment of hepatitis C. The long-awaited assault on high drug prices had begun. Biotech indices fell about 20 percent right away but by the end of June were basically back to pre-Waxman levels. Then in July, a Federal Reserve report declared biotech and tech stocks “overvalued.”
The biotech indices dipped briefly then resumed their upward march. Last December, pricing again took center stage, as the most powerful drug-purchasing middleman in the U.S., Express Scripts (NYSE: [[ticker:ESRX]]), made AbbVie (NYSE: [[ticker:ABBV]]) its exclusive provider of hepatitis C drugs. Hep C was surely ground zero for a price war that would radiate out to other kinds of treatment. Since that news, the indices are up about 15 percent.
If drug price wars don’t scare off investors, which industry-specific shocks might?
