Will Biotech Stocks Crash?

Each new virus-wave elicits less money into biotech ETFs; worse, money starts leaving a few months later.

All over Boston, new biotech buildings are going up. (I’m encompassing all health related businesses). Employees in the space have doubled to almost 100,000 in the past 15 years. The 5-year annual return of biotech stocks as been around 15% — not bad!

Much of this has already been built in past few years!

The rational for investing heavily in Boston as a biotech center is easy (btw, would say it is already #1 in the U.S., if not the world). There is a source of college grads from prestigious schools with many hospitals for testing.

The business case is an ever-growing aging and wealthy population.

If anything, construction accelerated during the pandemic.

There’s a good argument to be made that the worst of the pandemic will be over, come summer of 2022. Will biotech start to make “real” money (I don’t count the Covid vaccines which are one-offs)?

There are many headwinds to biotech which are seldom discussed — definitely not in Boston!

• Corporate borrowing rates at historic lows with recent signs of rising
• Massachusetts combined State and Municipal debt soon to pass $100 billion.
• “College enrollment rates have declined by an average of 1.67% per year since 2010” (educationdata.org)
• Public real estate companies in MA have high PEs or are operating at a loss, like Diversified Healthcare (DHC).
• Energy shortages in Europe and Asia threatening to further destabilize global markets.
• Water droughts and weather conditions adversely affecting farming pretty much everywhere

The large biotech companies have Price-to-Earnings (PE) ratio of 31. That means for every $1 they make, they’re valued at $31, if you were to buy the company outright. The historical average is around 14.

High valuations are a problem because most smaller biotech companies are completely reliant on continuous and new funding from VCs, etc. The smaller public biotech companies in Massachusetts have a market value of around $95 billion, but income of less than $4 billion a year.

Rising taxes, interest rates and/or weak capital markets in the future would put a severe strain on biotech funding, especially if people are rioting in the streets the world over for lower energy costs and food.

Of maybe Boston will sail calmly on, at it has so far.