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While we are basking in the glow of our genius as investors, it might be a good time to ask the question: Are biotechs currently overvalued?
My concern is not whether biotechs will continue to go higher. We are perhaps in the early stages of a sector rotation that is destined to carry us much further, into valuations we can scarcely imagine today, values fueled by momentum investing and the greater fool premise. When I speak of value, however, I mean intrinsic value, difficult to determine in the case of companies with uncertain promise, but subject to judgment nevertheless.
A couple of years ago, it was commonly said that the aggregate market value of all of the biotechs was less than that of Merck alone. That suggested to many of us that the sector was greatly undervalued. But now that my biotechs have soared beyond five times what I recently paid for them (something I suspect is not all that uncommon, and which must pale in comparison to some of your results), I wonder if the sector has reached fair value.
We should remember that only a short time ago Sugen, SIBIA and Agouron sold out at prices that were a fraction of what they would go for today. While their managements may have had motivations beyond the values received, didn't they think they were receiving something in the range of fair falue? Recently, Cell Genesys was ready to sell out at about $10 per share. Today those shares sell at $52.
I pose two questions: (1) Is the biotech sector as a whole undervalued, fairly valued or overvalued - and why? (2) Which particular stocks, if any, do you think are overvalued - and why? I have reached no conclusions myself. Suffice it to say, my only sales have been to pay off margin debt or to buy more biotechs.
Jim Haynes
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