One of the downsides from Quantitative Easing has been the increasingly lower return hurdles demanded by investors to deploy their capital. If you can only get 2% risk free in 10yr Government paper (err let's gloss over the fact that you are very likely to lose money in real terms guaranteed) then you start to hunt around for other investments.
The US biotech sector fits the profile brilliantly: as an investor you aren't losing out much by investing in early stage companies which don't pay dividends as a similar investment in Govt bonds is only increasing at 2% pa. However you are probably investing in a company that has a very good chance of finding the cure for cancer, alzheimers or diabetes. The upside is truly enormous, 100 bagger minimum if you invest in small, early stage companies. At the same time, the large Pharma companies like Pfizer, Glaxo or AstraZeneca are looking in their own research pipelines and realising that the cupboard is pretty bare. It’s especially concerning for them as this is a time of patent expiries of some old, very profitable drugs, meaning that their Group profits will fall as a result. This has fuelled a raft of M&A in this space eg in large cap Pfizer bidding for Astra, Abbvie bidding for Shire Pharma and in the biotech space Alexion Pharma bidding $8.4bn for Synageva BioPharma, a company that has collectively lost $350m over the last 4 years. Add in some froth from the cancer arena over a new class of immunotherapy drugs known as anti PD-1s and PD-L1s which effectively block the cancer’s ‘cloaking mechanism’, allowing the body to hunt down and destroy the the cancer cell. The result is a heady cocktail of investor and pharma company interest has driven the NASDAQ Biotechnology Index to new highs this year. Since the start of 2011 the index is up 400%, it is now 3x higher than the previous peak in 2000. The chart just gives me vertigo. In comparison the wider Nasdaq Composite Index which includes tech names like Microsoft and Apple as well as biotech names is only just above its 2000 peak. It was more overvalued in 2000, but the situation appears to have been reversed.
The problem for me is that valuations have been pushed to ridiculous levels (in my opinion). The NASDAQ Biotechnology Index trades on over…
