In today’s edition of “Is it a bubble?” are the biotechs. Granted we can only say something is a bubble in retrospect but biotech stocks have certainly had a rapid run. Jason Goepfert at SentimenTrader has a great graphic up today showing the rapid expansion in money losing biotech IPOs. Today we are at levels not seen since the turn of century.

From an investor’s perspective this should at least give you pause if you are participating in the biotech sector. Brendan Conway at Barron’s takes a closer look at the research on biotech IPOs on how they tend to lead (or lag) the overall biotech sector.

Here’s another interesting finding: Biotech stocks themselves have tended to lead IPO activity by 2-4 months. There’s been a pattern of stocks correcting near IPO activity peaks, but their research points to using it as a confirming indicator, instead of a leading one.

In a certain sense we should all be gratified that this biotech IPO boom is happening. The fact is that we, or someone we know, will be a consumer of biotech products down the road. This spate of funding should help accelerate the development of new and novel therapies in the future.

It is not unlike the Internet bubble of over a decade ago. Were it not for the huge infrastructure spending that occurred back then we would not be experiencing the array of Internet-delivered services that we rely so heavily upon today. Daniel Gross then writing at Slate* talks about how it is bubbles actually provide a service for us all.

Simply put, bubbles are how new commercial infrastructure gets built in this country. In the 1840s and 1850s, European governments slowly strung up telegraphs from large city to large city. But in the United States, bubble-drunk entrepreneurs rampaged throughout the countryside, stringing up competing and often redundant wires way ahead of demand. Most went bankrupt. In the 1880s, vast competing, and often redundant, rail networks were built way ahead of demand. By 1894 about a quarter of the rails were in bankruptcy. The 1990s saw an orgy of commercial infrastructure built for the Internet. We all know how that ended.

Biotechs are not strictly speaking infrastructure. But the analogy still holds. We have no idea which of the biotech companies that went public in this wave will eventually develop viable products and by extension profits. But we can be hopeful that net-net society as a whole will benefit.

*And in his book: Pop!: Why Bubbles Are Great For The Economy.



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