Jacob,
1. foreward earnings forecasts are random numbers.
For early stage biotechs and tech stocks in general, your point is valid. But for the mature biotechs, I quite disagree. The earnings forecasts are primarily based on existing, approved drugs that are fairly early in their growth curves. You can see potential competition three years out, so that's not an issue. Sure a new side effect can emerge, but that is unlikely with these drugs that have been around for a while already.
2. even if those forecasts were accurate, there is zero correlation between biotech earnings and stock prices.
For the first tier profitable biotechs there most certainly is a correlation between earnings (and/or earnings growth) and price. Sure this is overlayed on top of market moves as a whole, so it's not the only factor.
3. full of events on the thin edge of the bell-shaped-curve
For the first tier companies there haven't been many events on the extremes of the bell curve at all over the last few years. You are confusing IMCL-type stocks with mature biotechs.
4. Until this industry gets mature enough that cash flow supports research/development/marketting costs, profits probably won't be helpful in predicting stock prices. These first tier companies are spinning off huge amounts of cash every year. They are highly profitable even though all their considerable research costs are being immediately expensed.
I'm not saying that these first tier biotechs are dirt cheap - they are not, which is why I don't usually hold them. But right now they are entering a sweet spot of low regulatory risk, high (and accelerating) earnings growth and generally easy comparisons to 2002.
Big approved drugs are very different beasts from just about anything else in the investing universe except perhaps Microsoft. They have margins comparable (literally) to printing dollar bills, and often freedom from competition for extended periods. Their growth is very predictable - for example I can predict now with a considerable degree of confidence that Lexapro, the newly launched FRX antidepressant, will be a billion dollar drug within a few years, even though sales last quarter were negligible and sales this quarter were about $80m.
Peter |
