Picking value is hard in the biotech bubble

Click to follow
The Independent Online
The rise and rise of the biotechnology sector of the stock market apparently knows no bounds. Chiroscience has seen its shares effectively double since last month's announcement that it may have a more advanced form of British Biotech's Marimastat anti-cancer drug. After a further 20p rise to 520p yesterday, its market capitalisation is now pounds 429m. This for a company which has never made a profit and which on Tuesday proudly announced a turnover of just pounds 5m for last year.

Others biotechs too have seen spectacular share price rises, if not quite on the Alpine scale of Chiroscience. The huge head of steam building up behind the sector is being driven by hopes that British Biotech, the acknowledged leader, will announce later this month that the latest tests on Marimastat are positive and bring it closer to the market. Prices are being maintained by wildly optimistic claims from certain brokers. Last month, for instance, Greig Middleton suggested that the "fair value" of British Biotech shares could be pounds 70 by early next year, more than double their current price of just below pounds 30. A year ago, they were worth less than pounds 5.

The current market in biotechnology stocks is taking on all the characteristics of a bubble, where investors are blind to the risks and keep piling in because the rewards promise returns beyond the dreams of avarice. Picking real value from the sector is akin to seeking needles in a haystack.The certainty that some of these companies will be abject failures should never be far from investors' thoughts.

Comments