Is Boston biotech in a bubble?
Companies are going public without revenues and the stock market is jittery. It feels like we’ve been here before, but there are some important differences.
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I was there for the dot-com bubble; I saw it all. From 1996 to 2002, I was the editor of Red Herring magazine, which the Wall Street Journal called the bible of the boom. I’ve kept the issues I edited from then. The swelling and deflating width of their spines tracks the financial euphoria and despair of the times. The cover of the May 2000 issue blares “Who Wants to Be a Billionaire?” Flipping through its 480 pages resurrects a lost world.
Here’s what a bubble looks like: Nasdaq, the main exchange for technology stocks, went from just 325 points October 16, 1990, to 5,048 on March 10, 2000. And then it fell, with sickening speed, hitting 1,114 on October 9, 2002, a 78 percent loss over just 30 months . Five trillion dollars in market capitalization had vanished. The Nasdaq wouldn’t recover its value for 15 years.
Today, we see the bursting of the dot-com bubble as a sort of morality play: punishment for lies, excess, and greed. But worthy companies that might have solved important problems were shuttered for lack of capital, tens of thousands of regular people lost their personal savings, and careers were permanently derailed. For me, the whole thing still smarts.
Our current era, with its mostly effervescent stock market and astonishingly valued startups, might seem comparable to the dot-com bubble. Boston, with its emphasis on science-based innovation, especially in biotechnology, has seen investors pour around a billion dollars into Intarcia Therapeutics, which is developing a treatment for type 2 diabetes; and $1.6 billion in equity financing into Moderna Therapeutics, which is creating new kinds of drugs using messenger RNA. (Flagship Pioneering, where I am now a partner, is an investor in Moderna.) In an uneasy echo of the Internet bubble, we’re seeing biotech companies go public without revenues. Boston’s Rhythm Pharmaceuticals, Waltham’s Kala Pharmaceuticals, and Cambridge’s Aileron Therapeutics raised $125 million, $90 million, and $50 million respectively in IPOs last year despite having no revenues.
But there are fundamental differences between this biotech boom and the Internet bubble. Life sciences companies and startups such as 3-D printing innovator Desktop Metal are based on scientific and technological breakthroughs, where the dot-coms were mostly creating online versions of existing businesses. And biotech companies have a good reason for going public before they have products: Inventing a marketable new drug can take a decade and as much as $2.5 billion, which most investment firms cannot sustain. But most importantly, the innovations of the current boom will have real impact on the health of patients and everyday life, eventually. For instance, the promise of drugs based on chimeric antigen receptors (CARs or CAR-Ts) is that they should effectively cure many types of cancer. These sorts of innovations are far less speculative than the business model experimentations of the Internet era.
We might nonetheless be in a bubble; financial wisdom is retrospective. Andrew Lo, a professor of finance at the MIT Sloan School of Management, says you can’t tell if you’re in one “until after the crash has occurred.” But he also says bubbles are part of the innovation process: “The very nature of innovation leads to exuberance. It happened with Internet companies, personal computers, tape recorders, and tulip bulbs, and it’ll happen with biotech as well.”
Business, like history, moves in great cycles. Periods of advances are followed by calmer eras. Are we doomed to repeat what we saw in the dot-com bubble? Not necessarily. “Just because we can’t avoid the next bubble and bust, it doesn’t mean we can’t do anything about it,” says Lo.
With recent lurches and heaves in the stock market in mind, people and companies should follow these deceptively simple rules: First, don’t risk more than you can bear to lose. Individuals may not want to bet their retirement on startups; they probably won’t be the next Amazon or Google. Companies, meanwhile, can’t assume perpetual access to cheap capital.
Second, pay down debt, so you don’t find your income shrinking just as access to credit dries up. Individuals should focus on reducing credit card debt, mortgages, and student loans. Companies should avoid debt-fueled acquisition binges. Note that this rule about debt even applies to nation states. John Maynard Keynes, perhaps the most influential economist of the 20th century, championed deficit spending during recessions to boost aggregate demand. But in times of economic expansion — times like these, where every significant part of the world economy is growing or expected to grow — he insisted governments run a surplus and pay off the national debt. In general, everyone should plan for a grimmer future when times are bright.
Oh, one more thing: Bitcoin and initial coin offerings like that of Filecoin or BET really are just bubbles — Ponzi schemes, even. Don’t put your money in them. Trust me, I’ve seen this before.