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Biotech Stock Mailbag: Bubble Debate, Cel-Sci, Zogenix, Zalicus

BOSTON ( TheStreet) -- Let's open this week's Biotech Stock Mailbag with a discussion of bubbles. Scott B. emails:

Adam, I read and enjoyed David Sobek's article on biotech stock bubble but was wondering if you had an opinion, one way or the other?

Yes, we're in the midst of a biotech stock bubble.

No, we're not.

Let me explain why I'm on the fence. We're not in a biotech stock bubble because the incredible performance and growth we're witnessing this year (and last year, too) is being driven by real, fundamental success. One buyside investor summed it up well for me this week:

"Shit is actually working!"

He's right. Biogen Idec's (BIIB) Tecfidera, Gilead Sciences' (GILD) hepatitis C drugs, Regeneron Pharma's (REGN) Eylea, Pharmacyclics' (PCYC) ibrutinib, the booming orphan drug launches led by Aegerion Pharma (AEGR), NPS Pharma (NPSP) and others. The biotech sector is developing more and better drugs than ever before, and as a result the fundamentals underlying the sector are stronger than ever. This is an undeniable fact and investors are acting accordingly, justifiably so.

Big-cap biotech's collective price-to-earnings (P/E) ratio isn't even close to historical highs. A 15-year chart courtesy of ISI Group's Mark Schoenebaum:

None of this means that some biotech stocks aren't overvalued. Sobek is right to differentiate between valuations that are stretched too far for select biotech stocks that are otherwise fundamentally strong and a true, irrational stock bubble. As he points out, strategic buyers of biotech assets -- Big Pharma -- seem to be recoiling at high prices. It's an important signal to watch for a possible correction.

But then, fund flows into biotech are off the chart. Generalist investors love biotech stocks right now. This chart helps explain why: IBB Chart IBB data by YCharts

Schoenebaum meets with a lot of generalist investors. In a recent video sent to clients, he sums up their mood:

Biotech sentiment is awesome. It's unbelievable right now. It's unlike, honestly, anything I've seen in my 13 years. I started in 2000 so I do remember the 2000 genomics bubble but that felt to me... more like a market issue or market call as much as a biotech call. Right now, it feels different. It feels like people are making a very specific biotech call.

Where is the biotech stock bubble strongest? In the small-cap stocks, particularly among the stocks I affectionally refer to as the "bio-crud." These are the companies I'm often accused of "bashing" -- Northwest Biotherapeutics (NWBO), Galena Biopharma (GALE), Osiris Therapeutics (OSIR), Oncolytics Biotech (ONCY), to name a few. They're also the stocks in which retail investor interest is the highest, unfortunately.

Institutional investors aren't touching these fundamentally weak stocks, but yet they also still move higher on crazy speculative buying, rumor-mongering and the greater fool theory.

There are plenty of biotech bubbles amongst the small-cap "bio-crud." And when these bubbles burst (and most inevitably do), the carnage isn't pretty.

Let's not forget Vical (VICL): VICL Chart VICL data by YCharts

Or Celsion (CSLN): CLSN Chart CLSN data by YCharts

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