2014 has seen biotech IPO’s skyrocket, despite the fact that many of these companies are in the early phases of drug development, and have a strong chance of failure. The timeline for an experimental drug to reach the market averages 15 years and typically requires a company to sink billions of dollars into research and development. Even more concerning for the potential biotech investor, only one in ten drugs that reach clinical trials ever receive FDA approval and actually land on the market.
Last week eight biotech stocks alone combined to raise $502 million from investors seeking massive returns in pharmaceutical companies that offer the promise of becoming the “next big thing”. Bubbles occur when stock prices are not backed up by sound fundamentals and many investors in the biotech field are investing speculatively, in the hopes that positive news releases will continually drive prices upward.
Intercept Pharmaceuticals INC (NASDAQ: ICPT) Shows Biotech’s Potential for “Overnight” Surges
The release of corporate news, such as an earnings’s report, has an enormous impact on a stock’s value. When a company experiences a surge or a plunge in its stock price, frequently it is backed by tangible data that misses or exceeds the expectations of experts. In early January, Intercept Pharmaceuticals released news that their experimental liver disease drug had “performed well” in clinical trials. As a result, investors saw shares of Intercept jump from the $72 range to north of $230; literally overnight. That is an incredible feat for a company whose staff totals 45 employees and currently has no products on the market. While sheer statistics for drugs seeking FDA approval stand at odds with Intercept’s stock-market trajectory, many believe Intercept’s revenues could exceed $2 billion by 2020.
What’s Behind Bubble Concerns?
The risks of biotech investment cannot be overstated, as establishing sound valuations for companies that pump large chunks of their earnings into research and development is nearly impossible. Even Intercept has experienced shortcoming, despite enjoying the success that newly public biotech companies will imitate. Intercept shares experienced a hiccup in January, amid concerns that their liver-disease drug carries the unwanted side effect of increasing cholesterol levels in patients.
38 biotech companies went public in 2013 and their collective returns of 43% were remarkable. Many are concerned that last year’s IPO success will entice weaker companies to go public, diluting the field of worthwhile biotech investments. The fact remains that regardless of a biotech company’s standing, the industry is particularly news-sensitive and experimental drugs do fail, more often than not. Similar to the overall S&P after 2013’s banner year, investors will have to be pickier when choosing biotech stocks this year.