David Fuller's view -
Veteran investors will remember the first boom in bioTechnology shares in the late Nineties. Prices crashed and brave backers vowed never to go there again.
But biotech is hard to ignore given the incredible gains of the past decade, driven by an ageing population and demands for better health care. Leading the charge has been the Biotech Growth investment trust. It has been run by Geoffrey Hsu of OrbiMed Capital since 2005. He also runs theWorldwide Healthcare Trust.
At its peak in July, Biotech Growth’s returns equated to more than 20pc a year over a decade. Even after falling hard since then, the five-year return still stands at 282pc, turning £1,000 into £3,820.
Have biotech shares become overvalued?
There are some pockets of overpriced stocks in emerging biotech but big biotech still has compelling valuations.
The sell-off we have seen since the start of the year really can’t be justified. It’s to do with the slowdown in China and the falling oil price. Biotech has no exposure to any of that.
Our chart (see below) shows that previously when the big biotechs have been cheaper, on price-to-earnings ratios, than the S&P 500 index it has turned out to be a good time to buy, which is the case now.
We believe the possibility of mergers provides a “valuation floor” for biotech. Single-product companies valued at $5bn to $10bn are in the sweet spot. We saw in 2015 that companies were still being bought at huge premiums of up to 140pc.
The bubble for the Nasdaq Biotech Index has certainly burst, so what happens next?
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