This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Small-Cap Biotechs Pursue IPOs Fastest in Decade

NEW YORK ( TheStreet) -- Major rallies in the Dow Jones Industrials (^DJI) and the S&P 500 generated most of the headlines in financial news so far this year. But one of the lesser-discussed stories can be found in the performance of the biotech sector, which has seen its biggest year-to-date rally since its inception in the mid-1990s.

The Nasdaq Biotechnology Index (NBI) gained by 36% so far this year. There are six biotech companies in the S&P 500, and the average gain for the group is 40% -- even with this year's massive earnings disappointment from Amgen (AMGN).

Gains like these would be understandable if there had been a significant medical advancement or a major drug release in the last few months. But since this has not been the case, some degree of caution is warranted.

The biotech industry certainly has a reputation for being one of Wall Street's riskiest investments. But it is clear that markets are waiting in anticipation of the next medical breakthrough. Broad interest in 10 of the sector's U.S. IPOs has generated early investments of nearly $750 million.


The focus of these companies centers on a wide range of areas, developing drugs for illnesses like hepatitis C and multiple sclerosis. The real reason behind this interest, however, might have more to do with the strong bullish sentiment supporting stocks as a whole than with the prospects for individual companies.

In fact, support for most of the clinical-stage biotechs hinges on the fate of a single drug, which adds to investment risk and begs the question of whether or not all this year's surge in interest is warranted.

Broader Sentiment in Stocks Supports Biotech

Widespread enthusiasm in stock markets this year has encouraged investors to take a chance on small biotech companies as they move forward in the hope of creating the next headline-grabbing medical miracle. Smaller biotech companies generally lack stable cash flow, and this means they tend to have a hard time working up interest from credit investors.

But these companies are now pursuing IPOs at the fastest rate in a decade, making up nearly 15% of all U.S. IPOs so far this year. Industry data shows that roughly one in 10 biotech companies are able to successfully launch and distribute one of its products, making investments in the sector a difficult practice. But when the right biotech companies are chosen, early investors can see substantial returns later on.


When we compare this year's performance in the Nasdaq Biotech Index (up 36%) to that of the S&P (up 18%), the possibilities for strong returns start to become clear. This year's performance in the Nasdaq Biotech Index surpassed the previous dotcom-era record, and doubled this year's bull rally in the S&P 500.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,279.74 +13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASDAQ 4,579.7890 -13.6380 -0.30%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs