Can Biotech Dominate for a 4th Year in a Row?

Only if investors continue to accept risk.

Feb 2, 2014 at 1:00PM

Biotech has been on one heck of a terror. According to Credit Suisse, the industry has been the top industry for the past three years, trouncing the S&P 500.





Biotech return




S&P 500 return




For the biotech industry to dominate for a fourth year in a row, one or more of the following things need to happen.

Flight to risk
One of the reasons the biotechnology sector has done so well recently is investors have been willing to take on more risk. As buyers outpace sellers, the value investors are willing to pay for pipelines increases.

The typical cycle starts with large-cap biotechs with multiple drugs on the market. As investors seek more risk, they invest in companies with a single drug and then move on to development-stage companies. Finally the most-risky investments are new companies going public.

A few years ago, private biotechs couldn't find enough buyers to support initial public offerings. Now IPOs are so oversubscribed that companies such as Dicerna Pharmaceuticals (NASDAQ:DRNA) tripled after its IPO this week. Dicerna Pharmaceuticals has a nice drug-discovery unit, but its pipeline is extremely early stage. It's going to be years before investors see any revenue from Dicerna's drugs.

Now, there's nothing more risky in the public biotech sector for investors to move into. The only way for valuations to increase further is for more generalist investors to move into the sector.

Biotechs get snatched up
Another reason biotech valuations remain high is that pharmas and large biotech companies keep snatching them up for premiums. While investing in the hopes of a takeout is generally a pretty poor investment thesis, it's certainly on investors' minds and adds something to the valuation of many biotechs.

Just the rumor of a buyout is enough to send a stock soaring. Ariad Pharmaceuticals (NASDAQ:ARIA) spiked 20% in one day last week when the London Mail newspaper said Eli LillyGlaxoSmithKline and Shire are all potentially interested in buying the company.

It doesn't really matter whether Ariad Pharmaceuticals gets bought. The industry can handle rumors that don't turn out to be true.

What's important is that some biotechs get purchased this year, giving everyone else hope that the companies they own might get bought too.

Good old-fashioned earnings
The Nasdaq Biotechnology Index is made up of 116 stocks, but the top six make up around 40% of the index.

The value of those large biotechs -- Regeneron Pharmaceuticals (NASDAQ:REGN) and Amgen (NASDAQ:AMGN) have the largest weight as of the last update -- is driven less by their pipeline than by sales of existing drugs and the earnings they create. Even if investors pull back on their risk tolerance, the value of Regeneron, Amgen, and the rest of the larger biotechs won't change all that much as long as their earnings are growing at a reasonable rate.

Be careful out there
I'm not going to call the top, because predicting the end to euphoria is always difficult. But we've been through this before, and when the bubble pops, it isn't going to pretty. Selling begets selling.

For that reason, I think investors are much better off owning a basket of well-selected biotechs that they can sell when the potential reward doesn't justify the risk rather than owning the broader index through an ETF. Owning fewer stocks may be more risky because one failed trial will take a larger chunk out of the biotech portion of your portfolio, but the flexibility makes up for it.

Two game-changing biotechs
The best way to play the biotech space is to find companies that shun the status quo and instead discover revolutionary, groundbreaking technologies. In The Motley Fool's brand-new free report "2 Game-Changing Biotechs Revolutionizing the Way We Treat Cancer," find out about a new technology that Big Pharma is endorsing through partnerships, and the two companies that are set to profit from this emerging drug class. Click here to get your copy today.

Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers