On Friday, biotech stocks got slammed. The iShares Biotechnology Index (IBB) fell be 4.7%.
Once again, we have to wonder if biotech stocks have been in a bubble and if that bubble is beginning to burst.
As you can see in the chart to the right, returns in biotech stock have eclipsed the impressive returns of the S&P 500.
Unfortunately, it’s particularly difficult to judge whether or not a biotech stock is too expensive. Most of these companies generate no revenue and bleed cash in R&D for years. Investors generally focus on the addressable market of the product, betting on the odds it will eventually get the green light from the FDA.
Drugs like Lipitor and Viagra lost tons of money before becoming blockbuster billion-dollar drugs.
The stat that has market-watchers particularly worried is IPO volume.
According to data compiled by Renaissance Capital, 2013 was a historic one with a whopping 37 U.S. biotech IPOs. Through March 20 of this year, however, we’ve already seen 24. At that rate, we’re looking at over 100 biotech IPOs this year (not that there are actually that many deals in the pipeline right now).
“I don’t think it is a bubble,” said Rich Bernstein in an email to Business Insider. “It’s certainly very speculative, but speculation alone doesn’t make a bubble.”
So, is biotech in a bubble? Who knows.
We do, however, know there have been a ton of IPOs lately.