UNLIKE THEIR PEERS IN INFORMATION TECHNOLOGY, biotechnology stocks lately have had no trouble winning fans. After going nowhere for more than a decade, biotechs have shimmied up 111% over the past two years -- three times better than even the gains for the beloved health-care sector.
What accounts for their new glow, and can it last?
Adam Parker, Morgan Stanley's U.S. equity strategist, thinks that investors are once again becoming more willing to reward research and development. For years, money plunked into drug research didn't pay off, and valuations of companies engaged in R&D were punished because they were viewed as destroying shareholder value. Today, however, Parker counts fewer than 20 companies globally with market caps of more than $30 billion that do any health-care research. "Ten years ago, the human genome could barely be decoded. Ten years from now, one can guess that it will be done for pennies, nearly instantaneously," he writes. "We could be witnessing a substantial re-rating, where instead of a discount on R&D being embedded in health-care stocks, a premium could ultimately be awarded for the potential option value of curing a disease."
Once upon a time, R&D focused on chemicals that led to blockbuster drugs like Lipitor and Plavix. By the late 1990s, the focus had shifted to genomics and the study of encoded genetic instructions. A decade later, these endeavors are starting to pay off in the treatment of everything from cancer to autoimmune disorders. Biotech firms' profits are rising more than 20% a year, and in 2012, our regulators approved the most drugs in the past 16 years.