This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
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
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

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

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

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

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
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!
SYM TRADE IT LAST %CHG
CLDX $29.30 0.00%
CVM $1.19 0.00%
ZGNX $1.68 0.00%
ZLCS $11.40 3.35%
AAPL $128.54 0.00%

Markets

DOW 18,096.90 -106.47 -0.58%
S&P 500 2,098.53 -9.25 -0.44%
NASDAQ 4,967.1410 -12.76 -0.26%

Partners Compare Online Brokers

Free Reports

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