Biotech's Moment of Convergence
Biotech Sector Hits Magic Threshold...
2013 has already been a banner year for the biotech industry, and things promise to only get better from here...
Already up 30% year to date, iShares Nasdaq Biotechnology (IBB), the ETF that tracks average performance across the sector, is touching all-time highs since the ETF was introduced more than a decade ago.
After averaging less than $80 for the duration of its existence, IBB has surged close to 100% since 2012, with half of those gains coming inside the 2013 calendar year.
In fact, a full 38% of growth observed since the stock market's recovery began in 2009 came in the last seven months.
It's what prompted us to recommend IBB to readers of The Wealth Advisory.
We advised members to buy last November. We're now sitting on a gain of over 50%.
What does all this mean to you?
Well, what it tells me — right off the bat — is that the biotech space may be headed towards a bubble.
But that shouldn't scare you. On the contrary...
It should be getting your heart rate up right now — because bubbles are only bad when they burst.
Prior to bursting, they tend to bring investors strong, fast gains, as mainstream latecomers to the market start piling in.
One of the main features of a pre-bubble period (as illustrated by another famous bubble: the tech bubble of the early 21st century) is rapid growth within the smaller end of the market cap spectrum.
And this is exactly what's happening right now.
According to the Burrill State of the Industry Report, published for the last 27 years by Steven Burrill, CEO of Burrill & Company, smallcap biotech firms are outpacing their largecap brethren. Much of this recent expansion can be attributed to massive investment in the industry — a total of $130 billion raised in 2012.
This backing, according to Burrill, is coming less and less from high-profile IPOs, and more and more from angel investors, as well as from non-profit and government funding.
Technology-dependent industries have a tendency to achieve bubble-caliber growth when core technologies reach levels of development that allow for rapid innovation, diversification, and product development.
We saw this very thing happen in the late 90s, when Internet connectivity and processing speeds of personal computers hit a performance threshold that made things like streaming video, secure payment processing, and real-time communications possible within the household.
The automotive industry enjoyed a similar trend with hybrid and plug-in technology, which tripled its market share between 2004 and 2009, the same period during which the financial crisis sent car buyers back to the trenches.
Today this pattern is repeating itself with biotechnology as nano-technology, computer-aided design, and molecular engineering reshape the industry.
The bubble-like conditions we're seeing today are indicative of a moment in time when the right technologies reach the right level of development in order to be synergized into a whole new generation of products and procedures.
Referred to as "the zone of convergence," it is precisely this dynamic that gave us everything from the mass-produced automobile 100 years ago... to television... to personal computers... to cellular phones...
By all indicators, this moment in time is no longer in the distance future, but quite likely already revving up.
Perhaps the biggest indicators that biotech is really hitting its stride — and possibly starting to expand the bubble — are drug approval rates, which hit a 16-year high in 2012.
Major advancements in the field include:
- Synthetic vaccines, a quantum leap over organically grown vaccines, which have been cultivated using chicken eggs since the 1930s.
- Affordable genetic sequencing, which can cost as little as $1,000 and completed 1,000 times faster (not an exaggeration) than it was in the past.
- Genetically customized cancer treatments made specifically to dovetail with a specific person's unique DNA.
- Remote patient monitoring, thanks again to the magic of the Internet and wireless technology, which will allow doctors unprecedented data gathering capabilities.
- Synthetically grown blood vessels for replacing main arteries during procedures such as cardiac bypass surgeries.
- Lab grown organs, which made their public debut in a human patient earlier this year when a two year old born without a trachea was implanted with an artificially-grown organic windpipe grown from the patient's own stem cells.
This list continues on and on, hinting quite strongly that we are already past the very first stages of the 21st century's first biotechnological renaissance.
To say that there will investment opportunities in biotech this year and in the coming years is like saying there will be weather.
However, even within what promises to be a massive field of innovations, there will be standouts...
Stay tuned in the coming months, as I get more specific and in-depth with the technologies — and the companies behind them.
Brian is a founding member and President of Angel Publishing and investment director for the income and dividend newsletter The Wealth Advisory. He writes about general investment strategies for Wealth Daily and Energy & Capital. Known as the "original bull on America," Brian is also the author of the 2008 book, Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century. In addition to writing about the economy, investments and politics, Brian is also a frequent guest on CNBC, Bloomberg, Fox and countless radio shows. For more on Brian, take a look at his editor's page.
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