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Boston Capital

No end in sight for biotech bubble

Nobody makes a pill for this.

Investors are so wildly enthusiastic about the stocks of biotechnology companies they are pushing the prices of those shares through the roof. A question you will hear a lot today: Is there a biotech stock bubble?

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The short answer is, generally yes. Biotech stocks have been popular — and increasingly expensive — for a few years now. But gains in 2013 have pushed the valuation of many companies deep into bubble territory.

Bubbles, as we all know, don’t end well. Investors end up losing money, often by the buckets, and unpredictable collateral damage usually follows. Predicting when fortunes may change is another matter.

“Maybe eventually it becomes too much, but it can last for a long time,” says Jeff Mortimer, director of investment strategies at BNY Wealth Management.

So far, few points on the map have benefited more from the great biotech bull market than Greater Boston in general and Cambridge in particular.

Track all those local stocks and you will see the key characteristic that makes the entire biotech sector so bubbly. It isn’t about a company reaping excessive stock market rewards for a new product. It’s the sheer pervasiveness of huge gains among so many companies.

Big biotechs have been stellar this year. Biogen Idec Inc., a company with headquarters in Weston but labs in Cambridge, certainly counts itself among them.

Biogen Idec shares have soared 62 percent so far this year, which translates into roughly a $20 billion increase in its stock market value in less than 10 months. Over the summer, those gains turned Biogen Idec into the single most valuable public company in Massachusetts, a title held for many years by storage giant EMC Corp. of Hopkinton. Biogen Idec was worth something just north of $55 billion Monday.

Another relatively big biotech, Vertex Pharmaceuticals Inc. of Cambridge, has seen its shares jump 72 percent this year. Stock options held by executives and other employees have increased in value by about $500 million this year. How’s that for an employee incentive?

On the opposite end of the spectrum, developing companies have found an incredibly receptive market in which to go public.

Eight Massachusetts biotechs have launched IPOs in 2013, raising more than $600 million among them. Many of the new stocks won very generous valuations out of the gate and investors continue to support them. All of those eight new local stocks traded above their IPO price on Monday.

A crowd of Massachusetts biotech companies that fit in the middle — not huge, but also not brand new — are posting outsized gains this year as well. With some exceptions, those stocks have advanced anywhere from 50 percent to 200 percent so far in 2013.

A small sample: Shares of Lexington-based Cubist Pharmaceuticals Inc. are up about 56 percent so far this year. Celldex Therapeutics of Needham is well off its 2013 stock highs but still up 306 percent this year. Shares of Aegerion Pharmaceuticals Inc. of Cambridge are up about 209 percent. Each one of these companies is worth more than $2 billion today.

Biotech stocks lend themselves to a kind of enthusiasm that can easily outrace reality. The possibility of making money on a cure for a disease or a way to ease suffering is a potent combination. Call it monetized hope.

But biotech is still a long-shot proposition. Most drugs fail in development. Other complications erode stock prices. Shares that soar on hope in the lab tend to sag when a company actually tries to sell a product.

It’s true that biotechnology companies are operating in a kind of golden age, in which new technology and knowledge can lead to very big things. That’s one reason the stocks have been climbing for the last few years and why supporters, like Fidelity Select Biotechnology Portfolio manager Rajiv Kaul, are so optimistic about many companies over the next decade.

But Kaul agrees investors should think hard about what has happened to biotech stocks this year. “The sector is prone to busts and bubbles historically,” he said. “After a period of strong returns that’s a real question to ask.”

Some biotech companies will surely deliver on the promise in their labs. But an entire industry is being rewarded in advance by investors. That’s going to disappoint a lot of people.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
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