Biotech Stocks: Bubble?
Jorge is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Some years ago, my grandparents used to tell me: "Do it yourself before others can do it for you." After reading several media articles that the biotechnological sector was immersed in a speculative bubble, I decided I had to write an article in order to make readers know what a speculative bubble was as well as the history of previous bubbles.
Spanish Real Estate Bubble
One of the most famous speculative bubbles in Europe occurred in Spain. This country experienced rapid gains in the prices of new and second-hand housing for years. This Spanish real estate bubble was the beginning of the debt crisis that Spain is currently undergoing. Real estate prices in Spain grew more than a 100% in four years. This situation contributed to massive building in the housing sector. Buyers, who wanted to purchase houses, were attracted by the general feeling of a continuous growth in prices while sellers constantly increased sales' prices because they knew there was high demand. Although there was no apparent reason for the continuous rise in prices, it was difficult to stop this vicious circle.
But this is not the only bubble that took place in the world. In the year 2000, there was the so-called Technology bubble. This is possibly one of the most significant speculative bubbles. The feeling towards this bubble was similar to that produced with the price increment on Spanish houses. On the one hand, investors bought technological stocks because the sector would seem to have a very promising future. On the other hand, the fundamentals seemed to be irrelevant back then. For a better understanding of the technological bubble of the year 2000, please watch the movements made by the NASDAQ 100 index. For example, on March 10, 2000, the NASDAQ Composite index reached its historic peak to 5,048.62 supported by technology shares.
For example, on January 21, 2000, Microsoft (NASDAQ: MSFT) reached a price per share of $51.87 and its P/E was 42.47. Currently, Microsoft has a P/E of 14.69 approximately. These ratios show how overvalued the stocks of the technological bubble were in the year 2000.
I hope that the meaning of the word "bubble" in the stock markets and the latest bubbles caused in global markets are now crystal clear for you.
Is There any Biotechnology Bubble Actually?
The P/E ratio is a widely used valuation multiple that acts as a guide to the relative values of companies: a higher P/E ratio means that investors are paying more for each unit of current earnings per share, so the stock is more "expensive" than one with a lower P/E ratio.
In the table below, you can see the P/E ratios of the aforementioned shares in the year 2000 as well as the current ratios. Furthermore, I have also included both the historical share price in the year 2000 and the current one. In this way, you will understand why there is not any "biotechnology bubble."
Surely, the tables have left some readers speechless. As you may have seen, the chart above shows these companies were trading overvalued with the technological bubble during the year 2000. Currently, the majority of the companies’ above-mentioned are far from being in the same situation as they were in the year 2000.
For example, one of the most valuable drugs of Pfizer is Lyrica. This drugs provides Pfizer with some quarterly revenues of $1,035 million and its approval by FDA was in 2007. In the year 2000, Pfizer had a higher value without Lyrica. The same happens with Tysabri of Biogen Idec that provides with quarterly revenues of $280 million and was approved by the FDA in 2004. This reflects that these biopharmaceutical companies are now reaping the fruits of their labor.
On October 23, Amgen reported higher third-quarter profit. The company said net profit rose to $1.1 billion, or $1.41 per share, from $454 million, or 50 cents per share, a year ago.
Eli Lilly and GlaxoSmithKline are two examples of companies that are making efforts to increase their annual income. On the one hand, Boehringer Ingelheim and Eli Lilly recently announced that the European Commission has approved an expanded therapeutic indication for the DPP-4 inhibitor Trajenta to include use in combination with insulin in adults with Type 2 Diabetes. This significant progress will provide millions of dollars in revenue for Eli Lilly. On the other hand, GlaxoSmithKline has introduced a new program to help consumers recycle their empty GSK respiratory inhalers and keep waste out of landfills. The recycling of GSK respiratory inhalers may allow the company to lower costs and improvement in its income.
Therefore, I advise you to do research before investing in biotechnology stocks. The situation of the large-capitalization companies or multinationals is changing. It is being speculated that there is a possibility of significant advances in treatments against cancer and orphan treatments. Also other companies are facing an expiration of patents. This is the case of Roche Holding AG and its medication star, "Herceptin", because its patent could expire in the year 2014. So, these are the real motives by which some hikes have been seen in shares of small-capitalization stocks. But if you check biotechnology historical charts, you will see that they have always occurred in the course of the years.
Now, any reader will be able to answer the following question: Is there actually any biotechnology bubble? The answer should be: no, there is not.
*Chart data sourced from wikinvest.com, all other data sourced from yahoo.com.
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Jorge Aura has no positions in the stocks mentioned above. The Motley Fool owns shares of GlaxoSmithKline and Microsoft. Motley Fool newsletter services recommend Biogen Idec, GlaxoSmithKline, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.