Is Biotech In A Bubble? by Carl Brown, The Royce Funds

Portfolio Manager Carl Brown discusses valuations in the biotech industry. What does he look for in an area that led the market before correcting in 2015’s third quarter?

See the video here.

Unicorns biotech bubble
Unicorns

People ask me all the time if biotech is in a bubble and I often share with them an observation before I answer that question.

The observation I like to make is that I think the bulk of this debate about a biotech bubble and what people struggle to come to grips with when they look at the biotech space is the simple phenomenon of what used to be the universe of the venture capitalists now resides in the public markets.

Companies are coming to – becoming public at an earlier stage in their lifecycle when they are at the very early stages of developing their pipelines, and that makes it very difficult to value. You have got very high reward but also very high-risk opportunities out there.

I think that is the bulk of what people are struggling with and I don’t think there is anything wrong with the fact that a lot of these companies are public.

It is just a different game and I think, if you are invested in that space, you need to be mindful of that because it requires a different skill set. That is not really the pond that we are fishing in.

We are going to be looking at companies that either have established businesses that are already profitable or product sales that are generating good sales and good gross profits.

Maybe they are not profitable yet because they haven’t grown to the point where they are able to cover their fixed infrastructure costs but they are much further along than a lot of the stuff that’s leading to the debate within the biotech bubble.

So that’s the observation and, to try to answer that question of are we in a bubble, I have to say the only way I would answer that is sort of one company at a time.

There’s a lot of overvalued companies out there but we still think there’s a lot of cheap companies out there, even within the biotech space.