- Historical stock markets crashes were often preceded by clear patterns, which often repeat themselves before unleashing turmoil in the market.
- The patterns help to identify parts of the market which might be getting too ahead of themselves like housing in the last decade and Internet in the decade before that.
- These patterns are now evident among bio-techs and a bust in the booming bio-tech sector may not be far from reality.
One advantage of age is the ability to see patterns repeat themselves. For 20 years I have called these patterns “clues,” and much of my reporting has consisted of identifying people or industries that are “clued-in,” aware of the patterns and riding them, or “clueless,” unaware of them and falling victim to them.
Every recovery has a rising industry that creates enormous value but gets a little ahead of itself. In the last decade it was housing, which financial engineering turned into the Great Recession. In the decade before that it was the Internet, the dot-com revolution, resulting in the market crash I remember as the dot-bomb.
I saw it coming from miles away, and anyone who followed my advice in 1997 may now regret it. Because the years from 1997-1999 saw enormous gains in a host of stocks. It’s just that there were too many of them, they didn’t have the revenues or profits to justify the valuations, and once Time Warner “bought” AOL, with AOL shareholders getting 55% of the entire company, the top was seen, everyone was in, and the crash was inevitable.
I am now convinced that the next crash will come among the biotechs. As with the Internet, they’re great companies doing big things. Radius Health (NASDAQ:RDUS) has a solution to osteoporosis. Gilead (NASDAQ:GILD) has found a cure for hepatitis C. Even Bristol Myers (NYSE:BMY) is suddenly a hot stock on the heels of Opdivo, an immunotherapy drug targeting cancer.
The market caps of biotech companies are on fire. Regeneron (NASDAQ:REGN) is worth $54 billion. Celgene (NASDAQ:CELG) is worth $90 billion. Gilead is worth $177 billion. These are numbers that are a step-change above what Internet companies were worth back in the day, just as Internet fortunes are a step-change above what oil fortunes were.
Now, I’m not saying these are bubbles about to pop. I’m also not saying that there isn’t absolute, real value being created. After all, the Internet as a concept has certainly justified the 1990s’ faith in it.
But at some point we’re going to be all-in on biotech, a merger or other catalyst will appear that makes everyone realize that, and at that point a lot of value is going to disappear, very quickly.
There are two reasons for this.
The Internet is one reason. Clouds and new visualization tools are helping accelerate the discovery of new compounds, they’re helping scientists model the impact of these compounds far more quickly, and they’re bringing many, many new compounds into testing programs with brighter prospects than ever before.
At some point, someone is going to realize that this means competition in cures. This is the second danger sign. Gilead calls its hep-c pills Harvoni and Solvaldi. It charges $84,000 for treatment, but the treatment is a real cure, and many people don’t object to the price. But AbbVie (NYSE:ABBV) has had a hepatitis drug approved, called Viekera Pak, and Express Scripts (NASDAQ:ESRX) decided its lower cost justified making that its preferred treatment. Over time competition is going to come to other sectors of the drug business and just as oil over-supply eventually caused a crash in prices. So it will be here.
Right now biotechs are being priced based on their being able to get whatever they want for the miracles they create. Patent protection is said to create a monopoly. But a patent only covers what a compound is, not what it does. There will be multiple patents issued to cures, resulting in competition. The technological revolution that enables all this discovery will guarantee it.
At some point the market will come to this conclusion. There will be mergers as drug companies without big-time new compounds see “bargains” among those companies that have them. At some point in there, we’ll be all in, and the crash will come. Biotech will be the next dot bomb.
Will it happen this year? Probably not. Next year? Maybe not. But it will happen, and the fallout will be spectacular. Be aware. Just because something is a real good thing, that doesn’t mean it’s always going to be worth what people are willing to pay for it. Every boom busts and the bigger the boom, the bigger the bust.