Is there still value in the biotech boom?

The prospect of investing in biotechnology is still daunting. In the early 2000s the sector was plagued with clinical failures which often meant investors lost out. Confidence in the sector paled, and small innovative companies - often listed on junior markets - struggled to drum up much-needed funds.

Perverse as it may seem, the onset of the financial crisis actually improved prospects for the biotechnology sector. For one, their relationship with their big pharma cousins became much closer. With global drugs giants forced to streamline their in-house research and development (R&D) divisions, management teams were forced to look beyond their in-house resources to find the next big blockbuster drug. In healthcare, product portfolios are a key indicator of a company's value, and biotechnology companies offered big pharma a cost-efficient way to build a stack of future medicines. The benefits of these R&D tie-ups flowed both ways. Biotechnology companies that established effective patented technology platforms were able to strike up lucrative licence or royalty deals with big pharma partners, or were occasionally bought out at a hefty premium.

Renewed confidence

As this changing relationship evolved, confidence in the sector started to build. Over the last 18 months, there's been a veritable 'biotech boom' in the number of companies seeking a listing on public markets - more often than not on Wall Street, where they are usually granted a warmer reception from investors. Fierce Biotech - the sector's leading publication - recorded 45 biotech IPOs in the US in 2013, which raised a collective $3bn (1.87bn) to support their ongoing drug development programmes. Forbes magazine noted in September 2013 (when 30 biotechs had already listed in the US) that 2013 marked the second most successful year for biotechnology IPOs in the industry's 30-year history.

But why did last year mark a change in the fortunes of biotechnology stocks? If investors were wary of the sector, what caused the sudden surge of optimism? Bruce Booth, a life sciences commentator at Forbes magazine, said that confidence was driven upwards by the return of generalist fund managers, who were intent on chasing the sector's outperformance. Biotech, and in particular the Nasdaq Biotech Index, had significantly outperformed other investment sectors since 2010. Put simply, the superior rates of returns outweighed any lingering anxieties.

Biotech bounds ahead

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Is there still value in the biotech boom?