Valuations in the biotech sector don't indicate a bubble but rather a renaissance in research and development, as well as a supportive regulatory environment, Franklin Templeton’s Evan McCulloch has said.
The manager, who specialises in the sector, sought to assuage fears of overheating in the sector in his latest investor note.
‘We don’t believe we are seeing a biotech bubble right now, for a number of reasons,’ said McCulloch, who runs the Franklin Biotechnology Discovery fund.
‘We look at valuations over a long period of time. In terms of the large-cap stocks, the price-earnings (P/E) multiples have expanded to currently about 20 times from about 10 times at their trough roughly two and a half years ago.
‘The current levels are in line with the historical average for those stocks over the last 10 to 15 years, but that’s also in line with growth rates.’
Further to this McCulloch said large-cap companies in the sector are in the midst of a major new product cycle, which supports the current multiple levels.
‘We think the bottom line in terms of why the biotech rally has occurred is improving fundamentals. There’s been a renaissance in research and development (R&D) productivity.
‘We’ve seen a number of new products generate positive clinical data, and not just the ones mentioned here; we’re seeing a number of mid-stage and early-stage pipeline products that look very promising as well.’
In addition, McCulloch said the current regulatory environment was in a positive place for drug companies in terms of gaining drug approvals.
This, he said, was matched by many recent drug launches, which have shown how a drug can quickly regain a lot of the costs accrued in the approval process.
In terms of positioning, McCulloch said he has focused more readily on the small-cap stocks, which have shown a lot of value despite not participating in recent rallies seen by their large-cap counterparts.
‘They tend to be riskier companies, as they typically have most of their value housed in one or two developmental-stage programs,’ he said.
McCulloch has returned 156.45% over the three years to the end of February 2014. This compares with an average manager return of 114% over the same period.