THE BIOTECH MELTDOWN IS AT HAND

“THE BIOTECH MELTDOWN IS AT HAND”

By Gary Kaltbaum
@GaryKaltbaum
garyk.com
Fox News Business Contributor
First…our report from last December:
We have told you for quite a while that the biggest bubble in history is the bond market. Central banks have spent trillions to keep rates down. To their credit, it has worked. But the final outcome? Remember, all bubbles eventually pop…and they pop when everyone is on one side of the trade. We are already seeing a small pop of the bubble in junk bonds as yield and price have been distorted for the past few years.

This is a warning shot on another area. We have mentioned this before but have now dug deeper. But a disclaimer first. WE DO NOT KNOW WHEN THINGS END. BUT WE WILL BE ON WATCH FOR WHEN THEY END. We are talking BIOTECH. We are not talking about the Amgens or Biogens. We are talking about the lovely investment banking community that in their infinite wisdom has brought approximately 124  BIOTECH companies public in the past 2-3 years…with that number ramping up in the past year. This by itself is no biggie but digging deeper is a biggie.  But first: Back in 98-99, as the bull matured, investment banks hurriedly brought a ton of internet names public. Many of them were suspect. Many were money losers. Some had no sales. They were able to bring these suspect companies public because the sector was hot and the public bought it. Remember, if there is demand, it will be supplied. Some of these companies doubled on the open and went up 5 and 10-fold. Of course, we know the final outcome. When things ultimately turn, the curtains come down. Many of those names are either gone or trading for pennies.

Fast forward to today. The hottest sector is the Biotechs. Many IPOs are coming public at $15…$25…and so on. The common denominator is most are opening strong. Some are doubling…some are tripling…some are even up more than that. But…ok, let’s capitalize it…BUT there is one huge issue. MOST OF THESE IPOs HAVE NO SALES. We did not say no earnings. We said NO SALES. A handful have a small amount of sales. All have massive losses.  A quick glance of the total market cap of all these names is approximately $55-60 billion. Yes…$55-60 billion dollars of market cap with hardly any sales and a ton of losses.

We have no clue when the music stops. We just know that from the study of history of the markets, the music will eventually stop…and when it does, it will not be pretty. We are not telling you to buy, sell or hold. In fact, they can continue higher and we may just see a few buyouts. Yes…buyouts of companies with no sales is also a characteristic of bubbles.  This is just a word to the wise as fear and greed look and act the same in every bull and bear market. Bubbles suck you in and then spit you out.  Do not be the last one in. For now, the music is still playing.
And now:

Since that report, we have written at least 20 times that the Biotechs were the Internets of 1999…and that besides the bond market, it is the biggest bubble out there. That bubble is now bursting. And just to update, there has now been over 200 Biotech IPOs come public in the past 2-3 years…WITH NO SALES…foisted upon an unwary but greedy public that will buy anything that moves regardless of valuation.

Let us repeat…over 200 IPOs WITH NO SALES foisted upon an unwary but greedy public by the wonderful human beings at the investment banks that would bring public cow dung if they thought it would be bought up. The total market cap of these 200 names is now over $100 billion dollars. There have also been a ton of secondary offerings with some names having a whopping 5 secondaries in the past year. That’s the boys cashing out to the unwary. Wall Street actually brought out an ETF that was only for Biotechs that were in clinical trials. That’s how bad it has become. To add one more bit of comedy, we counted a couple of names that were actually bought for billions. We suspect those deals will get unwound.

Some of these names have already quietly dropped 50% from their highs. We think there is a lot more to go. Bear markets pull down the curtains of assinine, assiten, asseleven valuations and stupidity and this fed-induced bubble could be one for the record books when all is said and done.

We just know that from the study of past bear markets, companies with no earnings usually get slammed. Companies with no sales, once the spigot of secondaries stop, usually run out of money with many going bye-bye.

We suspect when all is said and done…well, just think pets.com, buy.com and the rest. And pets.com actually sold some biscuits.