Why Fears Of Biotech Being Overvalued Are Unwarranted?

The biotech sector has unarguably been the best performing sector of the bull market that begun post the financial crisis. In the past 5 years alone iShares NASDAQ Biotechnology Index (ETF) IBB which can be taken as a proxy of the biotech sector has increased by more than 300 percent.

However, after such a decent performance, some market participants are getting worried that the sector might be reaching overvaluation levels.

John Schroer from Allianz Global Investor was on CNBC recently to discuss why the fears of biotech sector being overvalued are unwarranted. He also discussed the outlook for his top biotech pick Vertex Pharmaceuticals Incorporated VRTX.

No Overvaluation

“Biotech has been the top performer in each of the last four years and so it’s a fair question for people to ask whether or not we are in a biotech bubble,” Schroer said. “I would say there’s really two points as to why we are not. The first will be valuation and the second fundamentals.”

“Right now the top biotech company, those that are profitable are trading at just under 18 times earnings, which is close to the market average.”

He continued, “And then on a fundamental basis you can contrast that with 2000-2001 where the biotech sector was driven by genomics, genomics platforms and was actually losing money, whereas today the biotech sector as a whole is generating profits of over $27 billion.”

Vertex Pharmaceuticals

Schroer was asked about one of his top biotech pick Vertex Pharmaceuticals, which received negative comments for its cystic fibrosis drug Orkambi from the FDA ewcently. He replied, “I think the shares are up today. Investors are concerned. What FDA was weighing in on is the combination treatment.”

“Now, this combination will more than quadruple the size of the addressable market for cystic fibrosis by Vertex products. The absolute benefit was fairly small. But the FDA did say in the documents that the drug is having an impact,” Schroer concluded.